Question

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

Answer 1

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”