Question

Suppose that investors expect Luna Holdings to pay a dividend next year of $1.48 per share, and they expect that dividend to continue growing at 4.3% per year indefinitely. What would they pay for Luna Holdings stock if the required rate of return on the stocks is about 7.5%?

Answer 1

Expected Dividend next year(D1) = $1.48 per share

Growth rate of Dividends(g) = 4.3% per year indefinitely

Required rate of return(Ke) = 7.5%

- Calculating the Current Stock price of Luna Holdings:-

P0 = D1/(Ke-g)

P0 = $1.48/(0.075-0.043)

P0 = $ 46.25 per share

So, you would pay $46.25 per share for Luna Holdings stock

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