Richardson Brothers is expected to pay a $1.25 per share dividend at the end of the year (that is, D 1 = $1.25). The dividend is expected to grow at a constant rate of 7 percent a year. The required rate of return on the stock, r s, is 12 percent. What is the stock’s value per share?
a. |
$11.15 |
|
b. |
$23.36 |
|
c. |
$26.75 |
|
d. |
$10.42 |
|
e. |
$25.00 |
The stock’s value per share
Here, we have Dividend per share in year 1 (D1) = $1.25 per share
Dividend Growth Rate (g) = 7% per year
Required Rate of Return (Ke) = 12%
As per Constant Growth Dividend Valuation Model, the Price of the Stock is calculated as follows
Price of the Stock (P0) = D1 / (Ke – g)
= $1.25 / (0.12 – 0.07)
= $1.25 / 0.05
= $25.00 per share
“Hence, the stock’s value per share would be (e). $25.00”
Richardson Brothers is expected to pay a $1.25 per share dividend at the end of the...
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