Question

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.50 next year. The growth rate in dividends for all three companies is 6 percent. The required return for each company's stock is 8.20 percent, 12.10 percent, and 15.70 percent, respectively.

What is the stock price for Red. Inc., Company?

What is the stock price for Yellow Corp. Company?

What is the stock price for Blue Company?

Answer #1

We will use the formula
- **Price of
stock = D1 / (Re - g)**

Where D1 is the dividend for year 1

Re is required rate of return

g is growth rate

**Note - In the
question it states that the companies will pay dividend $2.50 next
year . This is D1.**

D1 = $2.50

g = 6% or 0.06

**Calculation of
Price of Stock for Red Inc**

Re = 8.20% or 0.082

Price of stock = D1 / (Re - g)

= $2.50 / (0.082 – 0.06)

= $2.50 / 0.022

= $113.64

**The Price of stock = $113.64**

**Calculation of
Price of Stock for Yellow Corp**

Re = 12.10% or 0.121

Price of stock = D1 / (Re - g)

= $2.50 / (0.121 – 0.06)

= $2.50 / 0.061

= $40.98

**The Price of stock = $40.98**

**Calculation of
Price of Stock for Blue Company**

Re = 15.70% or 0.157

Price of stock = D1 / (Re - g)

= $2.50 / (0.157 – 0.06)

= $2.50 / 0.097

= $25.77

**The Price of stock = $25.77**

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