Question

Estimate the current true value of Geo Corp stock that you expect to pay a dividend of $1.80/share next year and grow at a 4%/year rate in the future. You believe the cost of equity is 7.0%.

Answer 1

Solution:

The current true value of a stock is calculated using the following formula:

P0 = D1 / ( ke – g )

Where

P0 = Current value of a stock ;      D1 = Dividend per share payable next year ; g = growth rate ;

ke = Cost of equity ;

As per the information given in the question we have ;

D1 = $ 1.80 ;       g = 4 % = 0.04 ;    ke = 7.00 % = 0.07   ;

Applying the above values in the formula we have the current value of a stock as

= 1.80 / ( 0.07 – 0.04)

= 1.80 / 0.03

= $ 60

Thus the estimated current value of stock of Geo Corp is = $ 60