Question

Stock Valuation and Required Return [LO1] Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.65 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s stock is 8 percent, 11 percent, and 14 percent, respectively. What is the stock price for each company? What do you conclude about the relationship between the required return and the stock price?

Answer 1

For Red Inc,

For Yellow Corp,

For Blue Company,

Based on the three calculations above, we can conclude higher the reqired return, while keeping the dividends and growth rate constant, price of share would decrease.