Question

Newco paid a $0.25 annual dividend in 2019 and expects to pay $0.265 in 2020. Assuming...

  1. Newco paid a $0.25 annual dividend in 2019 and expects to pay $0.265 in 2020. Assuming a 6% growth rate and a required rate of return of 10%, calculate the value of Newco’s stock.
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Answer #1

Value of Newco’s stock is $ 6.625

As per dividend discount method, current price of stock is the present value of future dividends which is calculated as follows:
Present Value of annual dividends = D1/(Ke-g)
= 0.265/(0.10-0.06)
= $    6.625
Where,
D1 = Annual dividend = $    0.265
Ke = Discount rate = 10%
g = Growth rate = 6%
So, Price of Stock is $ 6.625
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