Question

Ivanhoe Corp. has been selling electrical supplies for the past 20 years. The company’s product line has changed very little in the past five years, and the company’s management does not expect to add any new items for the foreseeable future. Last year, the company paid a dividend of $4.70 to its common stockholders. The company is not expected to increase its dividends for the next several years. If your required rate of return for such firms is 12 percent, what is the current value of this company’s stock? (Round answer to 2 decimal places, e.g. 15.25.)

Answer 1

=> It is given that dividend = $ 4.70 and it is not expected to increase the dividends for next several year(that means the dividend growth rate = 0%), also it is given that required rate of return = 12%

=> Since the dividend has a zero growth rate we can use zero growth dividend discount model for finding the current value of the stock

=> Zero growth dividend discount formula:

, where is the current value , D is the dividend and r is the required rate of return

=> Plug the values into the formula

=> Therefore the current value of the company's stock is $ 39.17