Question

World tour Cole has just now paid a dividend of $2.83 per share; it's dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value of the stock, after paying the dividend

Answer 1

Information provided:

Current dividend payment= $2.83

Dividend growth rate= 6%

Required rate of return= 16%

The question can be solved using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of stock today= $2.83*(1+0.06)/ 0.16 – 0.06

                                      = $2.9998/ 0.10

                                      = $29.9980  $30

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