Question

# Jennifer Davis is interested in buying the stock of Pharoah, Inc., which is increasing its dividends...

Jennifer Davis is interested in buying the stock of Pharoah, Inc., which is increasing its dividends at a constant rate of 9.5 percent. Last year the firm paid a dividend of \$2.65. The required rate of return is 17.00 percent. What is the current value of this stock? (round to 2 decimal places)

#### Homework Answers

Answer #1

Answer - Price of the stock today = 38.69

Step 1 - Formulae

S0 = D1 / (Re -g)

where

S0 = Stock Price today

D1 = Dividend at the end of year 1

Re = Required rate of retrun

g = Growth rate

Step 2 - Calculation of dividend at the end of year 1 (D1)

first of all we will calculate Dividend at the end of year 1 (D1)

It is given in the question dividend will grow at the rate of 9.5%

Therefore dividend at the end of year 1 (D1) = last year dividend * (1+g)

D1 = 2.65 * 1.095

D1 = 2.90175

Step 3 - Calculation of Stock price today (S0)

S0 = D1 / (Re -g)

S0 = 2.90175 / (0.17-0.095)

S0 = 2.90175 / 0.075

S0 = 38.69

Therefore stock price today = 38.69

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