Gentleman Gym just paid its annual dividend of $4 per share, and it is widely ex

Question

Gentleman Gym just paid its annual dividend of $4 per share, and it is widely expected that the dividend will increase by 2% per year indefinitely.

What price should the stock sell at? The discount rate is 18%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What price should the stock sell at? The discount rate is 10%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Gentleman Gym just paid its annual dividend of $4 per share, and it is widely expected that the dividend will increase by 2% per year indefinitely.

Explanation / Answer

Hi,

Please find the answer as follows:

Current Stock Price = D1/(ke-g)

Part A:

D1 = 4*(1+.02) = 4.08

ke = 18%

g = 2%

Current Stock Price = 4.08/(.18-.02) = 25.50

Part B:

D1 = 4*(1+.02) = 4.08

ke = 10%

g = 2%

Current Stock Price = 4.08/(.10-.02) = 51.00 or 51

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

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