Question

Clarion Corp. has been selling electrical supplies for the past 20 years. The company's product line has changed very little in the past five years, and the company's management does not expect to add any new items for the foreseeable future. Last year, the company paid a dividend of 4.45 to its common stockholders. The company is not expected to increase its dividends for the next several years. If your required rate of return for such firms is 10.4 percent, what is the current value of this company's stock? Round to 2 decimal places.

Answer 1

a.       The current value of this company’s stock is computed as shown below:

= Dividend / required rate of return

= $ 4.45 / 0.104

= $ 42.79 Approximately

b.      The maximum price that we will be willing to pay for the company’s stock is computed as shown below:

= Last year dividend ( 1 + growth rate ) / ( required rate of return – growth rate )

= $ 2.20 ( 1 + 0.04 ) / ( 0.168 – 0.04 )

= $ 17.88 Approximately

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