Question

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.)

Answer #1

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.**

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