HomeworkLib
Question

Calculate the price of the stock, if it paid a dividend of $1.2 today, if the dividend is expected to grow at a constant rate

business   economics   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Solution :-

Given D0 = $1.20

Growth Rate (g) = 6.5%

Required Return ( ke ) = 12%

Now Fair Price of stock = D0 * ( 1 + g ) / ( ke - g )

P = $1.20 * ( 1 + 0.065 ) / ( 0.12 - 0.065 )

P = $23.24

Now Fair Price of Stock is $23.24

General Rule :-

If Fair Price > Actual Price , Buy the share

If Fair Price = Actual Price , Hold the share

If Fair Price < Actual Price , Do not Purchase the share

Therefore if Price is $20 Purchase the stock , as Worth of share is more than its price

And if Price is $30 Do not Puchase the Stock , as Worth of share is less than its price

If there is any doubt please ask in comments

Thank you please rate

0 0
Add a comment
Know the answer?
Add Answer to:
Calculate the price of the stock, if it paid a dividend of $1.2 today, if the...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Just today, Fawlty Foods, Inc.'s common stock paid a $1.40 annual dividend per share and had a closing price of $21

    Just today, Fawlty Foods, Inc.'s common stock paid a $1.40 annual dividend per share and had a closing price of $21. Assume that the market's required return, or capitaliza¬tion rate, for this investment is 12 percent and that dividends are expected to grow at a constant rate forever. a. Calculate the implied growth rate in dividends. b. What is the expected dividend yield7 c. What is the expected capital gains yield7. 

  • Constant Growth Valuation – Future Stock Price: Bessemer Steel recently paid a dividend of $5.00 per...

    Constant Growth Valuation – Future Stock Price: Bessemer Steel recently paid a dividend of $5.00 per share, which is expected to grow at a constant rate of 3% per year. Bessemer’s stock is currently trading at a market price of $42.92 per share. The required rate of return is 15%. What is the expected price of the stock 5 years from today?

  • 18. (8 points) Hayley Motorcycle Company just paid a dividend of $1.2 today, and is expected...

    18. (8 points) Hayley Motorcycle Company just paid a dividend of $1.2 today, and is expected to pay a dividend in year 1 of $1.6, a dividend in year 2 of $2.1, a dividend in year 3 of $3, and a dividend in year 4 of $4. After year 4, dividends are expected to grow at the rate of 1.5% per year. An appropriate required return for the stock is 7.9%, using the different- stage growth model, the stock should...

  • You are evaluating the purchase of Cool Toys, Inc. common stock that just paid a dividend...

    You are evaluating the purchase of Cool Toys, Inc. common stock that just paid a dividend of $1.80. You expect the dividend to grow at a rate of 12%, indefinitely. You estimate that a required rate of return of 17.5% will be adequate compensation for this investment. Assuming that your analysis is correct, what is the most that you would be willing to pay for the common stock if you were to purchase it today?

  • 1. The market price of a stock is $24.06 and it just paid a dividend of...

    1. The market price of a stock is $24.06 and it just paid a dividend of $1.44. The required rate of return is 11.53%. What is the expected growth rate of the dividend? Percentage round to 2 decimal places 2. A stock just paid a dividend of $1.13. The dividend is expected to grow at 29.53% for three years and then grow at 3.39% thereafter. The required return on the stock is 14.54%. What is the value of the stock?...

  • Valuation of Stock 1) P. Noel Company's common stock has just paid a $2.00 dividend. If...

    Valuation of Stock 1) P. Noel Company's common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? A) $15.00 B) $22.22 C) $23.33 D) $40.00 2) Green Company's common stock is currently selling at $24.00 per share. The company recently paid...

  • The next dividend that will be paid on your stock is expected to be $2.15. Dividends...

    The next dividend that will be paid on your stock is expected to be $2.15. Dividends grow at a constant rate of 6.5%. If the stock is currently selling for $71, calculate the expected return on this stock based on the constant growth model.

  • The ABX News Co. paid the last dividend of $1/share and the dividend is expected to...

    The ABX News Co. paid the last dividend of $1/share and the dividend is expected to grow at a rate of 20% over the next three years. It will then grow at a normal constant rate of 5% for the future. The rate of return is 12%. What should the stock price be today?

  • 1) A company recently paid out a $4 per share dividend on their stock. Dividends are...

    1) A company recently paid out a $4 per share dividend on their stock. Dividends are projected to grow at a constant rate of 5% into the future, and the required return on investment is 8%. After one year, the holding period return to an investor who buys the stock right now will be: A. 5% B. 3% C. 8% D. 13% 2) A company recently paid out a $2 per share dividend on their stock. Dividends are projected to...

  • Macy’s just paid a dividend of $1.80. If the required return is 12% and the dividend...

    Macy’s just paid a dividend of $1.80. If the required return is 12% and the dividend is expected to grow at a constant rate of 6% what is the most you would be willing to pay for the stock today? Question 19 options: a) $30.80 b) $31.80 c) $15.00 d) $30.00

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT