A company just paid a dividend of $0.81 per share and you expect the dividend to grow at a constant rate of 4.1% per year indefinitely into the future. If the required rate of return is 12.4% per year, what would be a fair price for this stock today? (Answer to the nearest penny per share.)
Current dividend= $0.81
Dividend growth rate= 4.1%
Required return= 12.4%
The question is solved using the dividend discount model.
Price of the stock today=D1/(r-g)
where:
D1=next dividend payment
r=interest rate
g=firm’s expected growth rate
Price of the stock today= $0.81*(1+ 0.041)/ 0.124- 0.0410
=
0.8432/ 0.0830
= $10.16
Therefore, the fair price of the dividend today is $10.16.
Get Answers For Free
Most questions answered within 1 hours.