Question

Ocean Holding Corp's expected year-end dividend (D_1) is $4.00, and its required return is 11%. The company's dividend yield is 5.6%, and its growth rate is expected to be constant in the future. What is the firm's stock price? Your answer should be between 42.36 and 108.62, rounded to 2 decimal places, with no special characters.

Answer 1

Dividend Yield = Current Dividend / Current Price = D₀ / P₀ {Equation 1}

As we know, according to the Gordon Growth Model P₀ = D₁ / R - g, where R is required return and g is the constant growth rate. Putting the value of P₀ in equation 1.

Dividend Yield = D₀ / [D₁ / R - g] = D₀ (R - g) / D₁ {Equation 2}

Also, D₁ = D₀ (1 + g). Putting this in equation 2.

Dividend Yield = D₀ (R - g) / D₀ (1 + g) =

So, we get Dividend Yield = (R - g) / (1 + g)

.056 = (0.11 - g) / (1 + g)

.056 (1 + g) = 0.11 - g

.056 + .056g = 0.11 - g

.056g + g = 0.11 - .056

1.056g = .054

g = .054 / 1.056

g = .051136

Now, Using the Gordon Growth Model

P₀ = 4 / (.11 -  .051136)

Price = $67.95