Question

The current dividend (Do) from Films, Inc. is $1.14 per share. Dividends have been growing at...

  1. The current dividend (Do) from Films, Inc. is $1.14 per share. Dividends have been growing at a constant rate of 7% per year, and this trend is expected to continue. If the required rate of return is 10%, what is the maximum price an investor should pay for the stock?

    a.

    $43.32
    b.

    $38.00
    c.

    $12.67
    d.

    $40.67
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Homework Answers

Answer #1

Price of stock = PV of CFs from it.

Particulars Amount
D0 $      1.14
Growth rate 7%
Ke 10%

Price of Stock is nothing but PV of CFs from it.
Price = D1 / [ Ke - g ]
D1 = D0 ( 1 + g )
= $ 1.14 ( 1 + 0.07 )
= $ 1.14 ( 1.07 )
= $ 1.22

Price = D1 / [ Ke - g ]
= $ 1.22 / [ 10 % - 7 % ]
= $ 1.22 / [ 3 % ]
= $ 40.67

Where
D0 = Just Paid Div
D1 = Expected Div after 1 Year
P0 = Price Today
Ke = Required Ret
g = Growth Rate

Max Price that can be paid for stock is $ 40.67

OPtion D is correct.

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