Question

A stock is expected to pay a dividend of $2.71 at the end of the year. The required rate of return is 9.2% and the expected constant growth rate is g= 4%. What is the stock's current price? (Answer in $s to the nearest cent, xx.xx, with no $ sign or commas needed.)

Answer 1

As per the Constant Growth Dividend Discount Model, the price of the stock is calculated by using the following formula

The Current Price of the Stock = D0(1 + g) / (ke – g)

Where, Last Year Dividend (D0) = $2.71 per share

Required Rate of return (Ke) = 9.20%

Dividend growth rate (g) = 4%

The Current Price of the Stock = D0(1 + g) / (ke – g)

= $2.71(1 + 0.04) / (0.092 – 0.04)

= $2.82 / 0.052

= $54.20 per share (Rounded to 2 decimal place)

“Therefore, The Current Stock Price = $54.20 per share”