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10. Global Airways common stock just paid a dividend of $1.75. The firm expects dividends to...

10. Global Airways common stock just paid a dividend of $1.75. The firm expects dividends to grow at a rate of 6.5% indefinitely. If investors require a rate of return on the stock of 13.75%, what is the value of the common stock today? (round to nearest 10 cents)

a.$66.20 b.$25.70 c.$22.00 d.$36.40

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Answer #1

The value of the common stock today

Here, we have Dividend per share in year 0 (D0) = $1.75 per share

Dividend Growth Rate (g) = 6.50% per year

Required Rate of Return (Ke) = 13.50%

As per Constant Growth Dividend Valuation Model, the Current Price of the common stock is calculated as follows

The Current price of the stock = D0(1 + g) / (Ke – g)

= $1.75(1 + 0.0650) / (0.1350 – 0.0650)

= $1.8638 / 0.0725

= $25.70 per share

“Hence, the value of the common stock today will be $25.70”

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