Question

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $1.45 next year....

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $1.45 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company's stock is 8.80 percent, 11.90 percent, and 14.20 percent, respectively. Required: (a) What is the stock price for Red. Inc., Company? (b) What is the stock price for Yellow Corp. Company? (c) What is the stock price for Blue Company?

Homework Answers

Answer #1

ANSWER

GIVEN INFO :

  • Expected Dividend (D1) : $ 1.45
  • Growth Rate (g) : 4%
  • Required Return (Ke) :

Red Inc = 8.80 %

Yellow Corp = 11.90 %

Blue Co. = 14.20 %

So "Value of Stock" can be Calculated using "Constant Growth Formula" which is as follows:

Value of Stock = Expected Dividend / (Ke - g)

(a) Stock Price of Red Inc. = 1.45 / (0.088 - 0.04)

$ 32.9545 approx {you can round off as per your requirement}

(b) Stock Price of Yellow Corp. = 1.45 / (0.119 - 0.04)

$ 18.3544 approx {you can round off as per your requirement}

(c) Stock Price of Blue Co. = 1.45 / (0.142 - 0.04)

$ 14.2157 approx   {you can round off as per your requirement}

IF ANY DOUBT PLEASE ASK IN COMMENT :)

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