BB Keenan Industries just issued its annual dividend of $1.25. Dividends are expected to grow at...

Question

Question

Answer 1

Answer #1

Solution:

As per the Dividend growth Model current value of a stock is calculated using the following formula:

P0 = [ D0 * ( 1 + g ) ] / ( ke – g )

Where

P0 = Current value of the stock ; D0 = Recent annual dividend paid ; g = growth rate ;

ke = Rate of return

As per the information given in the question we have ;

D0 = $ 1.25 ; g = 4.5 % = 0.045 ; ke = 11 % = 0.11

Applying the above values in the formula we have

= [ 1.25 * ( 1 + 0.045 ) ] / ( 0.11 – 0.045)

= (1.25 * 1.045 ) / ( 0.11 – 0.045)

= (1.25 * 1.045 ) / 0.065

= 1.306250 / 0.065

= $ 20.096154

= $ 20.10 ( when rounded off to two decimal places )

Thus the current value of Keenan’s stock is = $ 20.10

The solution is Option 4 = 20.10

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Answer 2

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