9. Hansen Delivery just paid an annual dividend of $2.50 per share. The company has been reducing the dividends by 4 percent annually and expects to continue doing so. What is the current market value for this company’s stock if your required rate of return is 13 percent?
$14.12 Please Show All Work.
| Formula for Dividend growth model |
| Po = D1/(re-g) |
| where, |
| Po = Current market value |
| D1 =Dividend for next year = $2.5*0.96 = $2.4 |
| G=growth rate = -4% or -0.04 |
| re= required rate of return = 13% or 0.13 |
| Po = 2.4/(0.13-(-0.04)) |
| Po = 2.4/(0.17) |
| Po = Current market value = $14.12 |
Using Dividend Discount Model
Current Market Price = [Dividend Paid * (1 + Growth Rate)] / [Required Rate of Return - Growth Rate]
Current Market Price = [2.50 * (1 - 0.04)] / [13% - (-4%)]
Current Market Price = 2.40 / 17%
Current Market Price = $14.12
ANSWER :
Given :
D0 = 2.50 ($)
r = 13 % = 0.13
g = - 4 % = - 0.04
So,
D1 = D0 ( 1 - 0.04) = 2.50 * 0.96 = 2.40 ($)
Now,
P0 = D1 / (r - g) = 2.40 / (0.13 - (- 0.04)) = 14.12 ($)
So, Price of $14.12 can be paid for this stock (ANSWER)
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