Question

Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year(that is,D1 = $0.50). The Dividend is expected to grow at a constant rate of 7 percent a year. The required rate of return on the stock, rs, is 15 percent.What is the stock's value per share?

Answer 1

Dividend growth rate (g) = 7% per year

Expected Dividend   (D₁) = $0.50

Required return rate   (R) = 15%

            CurrentStock Value (P₀) = D₁ / (R-g)

                                             P₀ = $0.50 / (0.15 – 0.07)

                                                  = $0.50 / 0.08

                                                 = $6.25

                                 CurrentStock Value per Share (P₀) = $6.25