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A firm just paid a dividend of $3.12. The dividend is expected to grow at a...

A firm just paid a dividend of $3.12. The dividend is expected to grow at a constant rate of 3.17% forever and the required rate of return is 11.00%. What is the value of the stock?

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Answer #1

Information provided:

Current dividend= $3.12

Growth rate= 3.17%

Required rate of return= 11%

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

Value of the stock= $3.12*(1 + 0.0317)/ 0.11- 0.0317

                             = $3.2189/ 0.0783

  = $41.1098.

Therefore, the value of the stock is $41.11.

In case of any query, kindly comment on the solution.

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