Assume a company X has a constant dividend growth rate of 4% per annum for perpetuity....

Assume a company X has a constant dividend growth rate of 4% per annum for perpetuity. This year the company has given a dividend of $5 per share. Further, the required rate of return for the company is 10% per annum. Then, what should be the purchase price for a share of company X?

Expert Solution

purchase price of stock	expected dividend/(required rate of return-growth rate)	5.2/(10%-4%)	86.67
expected dividend = current dividend*(1+growth rate)	5*1.04	5.2
required rate of return		10%
growth rate		4%

Purchase price of stock			86.67

jeff jeffy answered 2 years ago

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