Question

# Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of \$2.50 next year....

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?

#### Homework Answers

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 / (0.0820.06)

= \$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 / (0.1210.06)

= \$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 / (0.1570.06)

= \$2.50 / 0.097

= \$25.77

The Price of stock = \$25.77

Know the answer?
Your Answer:

#### Post as a guest

Your Name:

What's your source?

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Not the answer you're looking for?
Ask your own homework help question
ADVERTISEMENT
##### Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

ADVERTISEMENT