?- × Stock Valuation and Required Return - Excel Sign In HOME INSERT PAGE LAYOUT

Question

?- × Stock Valuation and Required Return - Excel Sign In HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW Calibri Paste B r u.ER.?·?. Alignment Number Conditional Format as Cell Cells Editing Formatting Table. Styles Clipboard Font Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.65 next year. The growth rate in dividends for all three companies is 5 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? s Dividend next year 265 Dividend growth rate Red required return Yellow required returr Blue required return 10 Complete the following analysis. Do not hard code values in your calculations. s Red price 17 Yellow price 19 Blue price 16 Sheeti ?? + 100% Attempt(s) 5814

Explanation / Answer

The formula to be applied is the Constant dividend growth formula of P0 = D1/(r-g) where P0 = Price of the share D1 = Next expected dividend r = required rate of return, and g = growth rate in dividends. Applying the formula the prices of the 3 firms are: Red Inc = 2.65/(0.08-0.05) = $           88.33 Yellow Corp = 2.65/(0.11-0.05) = $           44.17 Blue Company = 2.65/(0.14-0.05) = $           29.44

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