Question

Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $1.25 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.9 percent, forever. The appropriate rate of return on the stock is 14 percent, compounded quarterly.

What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

This can be solved by applying the Gordon's Growth Model

P = D1 / Ks - G

were P= Price of stock

D1= Next year dividend

Ks = Cost of equity

G = Growth rate

here D1 = $1.25 (This is the upcoming quarterly dividend so growth rate is included if dividend that was given is for the previous quarter multiply it with the growth rate.)

Ks = 14%

G = 1.9%

Here all figures are in quarter so no need to annualise.

P = 1.25 / .14 - .019

   = 1.25 / .121

Price = $10.33