Question

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?

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}

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