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Kay Williams is interested in purchasing the common stock of Reckers, Inc., whic

ID: 2622851 • Letter: K

Question

Kay Williams is interested in purchasing the common stock of Reckers, Inc., which is currently priced at $34.16. The company is expected to pay a dividend of $2.58 next year and to increase its dividend at a constant rate of 6.0 percent.

Kay Williams is interested in purchasing the common stock of Reckers, Inc., which is currently priced at $34.16. The company is expected to pay a dividend of $2.58 next year and to increase its dividend at a constant rate of 6.0 percent.


What should the market value of the stock be if the required rate of return is 14 percent? (Round answer to 2 decimal places, e.g. 15.25.)

Kay Williams is interested in purchasing the common stock of Reckers, Inc., which is currently priced at $34.16. The company is expected to pay a dividend of $2.58 next year and to increase its dividend at a constant rate of 6.0 percent.

Explanation / Answer

As per gordon growth model

Ke = (D1/P0) + g


Ke = 14 %

D1=2.58

P0= MV of stock

g= growth rate=6%

Market vale of stock =2.58/(0.14-0.06)=32.25