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The stock price of Rene Co. is $68

The stock price of Rene Co. is $68. Investors require an 11.00% rate of return on similar stocks. If the company plans to pay a dividend of $3.85 next year, what growth rate is expected for the company's stock price?


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Answer #1

The value of the stock of the company is the present value of all its cash flows discounted at the required return of the investors.

If the dividends of the company are expected to grow at constant rate, then following formula can be used to value the stock:

Where,

.

In the given case, if the next dividend expected is $3.85, required return is 11% and current stock price is $68, the constant growth rate of the stock will be:

Thus, the constant growth rate of the stock is 5.34%.

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Answer #2

The value of the stock of the company is the present value of all its cash flows discounted at the required return of the investors.

If the dividends of the company are expected to grow at constant rate, then following formula can be used to value the stock:

Where,

.

In the given case, if the next dividend expected is $3.85, required return is 11% and current stock price is $68, the constant growth rate of the stock will be:

Thus, the constant growth rate of the stock is 5.34%.

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