A stock is trading at $70 per share. The stock is expected to have a year-end di

Question

A stock is trading at $70 per share. The stock is expected to have a year-end dividend of $3 per share (D1 = $3), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 12% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of g? Round the answer to three decimal places.

Assume that the average firm in your company's industry is expected to grow at a constant rate of 4% and that its dividend yield is 5%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1 = D0(1 + g) = D0(1.50)] this year and 25% the following year, after which growth should return to the 4% industry average. If the last dividend paid (D0) was $3, what is the value per share of your firm's stock? Round your answer to the nearest cent. Do not round your intermediate computations.

Explanation / Answer

r=( D/P)+g, where D is dividend, P is price of the share, g is growth rate and r is required rate of return.

12= (3/70)+g

12= 4.285+g

g= 12- 4.285

g= 7.715%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.