In: Finance
Southern Power just paid an annual dividend of $6.3 per share. Because of increasing competition from home solar installations, the dividend is expected to shrink by 6% per year. The required rate of return is 8%.
Part 1
What should be the current stock price?
Here you can use constant divident growth model to compute the current stock price. The formula for computing Stock price under constant divident growth model is:
P = D0 (1 + g) / (r - g)
P = Current stock price = ?
D0 = Current divident = $6.3
g = Growth rate = - 6% ie, - 0.06
r = Required rate of return = 8% ie,0.08
Substituting the values in the formula gives,
P = 6.3 (1 - 0.06) / (0.08 - -0.06)
= 6.3 * 0.94 / 0.14
= 42.3
Therefore, Current stock prce is $42.3 per share