Question

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.


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?

Solutions

Expert Solution

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


Related Solutions

Southern Home Cookin' just paid its annual dividend of $0.65 a share. Dividends are expected to...
Southern Home Cookin' just paid its annual dividend of $0.65 a share. Dividends are expected to grow at 6% forever. The stock has a market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk premium is 6.8 percent. What is the cost of equity?
SCI just paid a dividend (D0) of $12.16 per share, and its annual dividend is expected...
SCI just paid a dividend (D0) of $12.16 per share, and its annual dividend is expected to grow at a constant rate (g) of 4.50% per year. If the required return (r) on SCI's stock is 11.25%, then the intrinsic value of SCI's shares is[ Select ] ["$195.25", "$181.25", "$188.25"]         ?   If SCI's stock is in equilibrium, the current dividend yield on the stock will be [ Select ] ["8.75%", "7.75%", "6.75%"] per share? If SCI's stock is...
A company just paid a dividend of $1.95 per share, and that dividend is expected to...
A company just paid a dividend of $1.95 per share, and that dividend is expected to grow at a constant rate of 4.50% per year in the future. The company's beta is 1.65, the market risk premium is 8.5%, and the risk-free rate is 6.50%. What is the company's current stock price?
The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected...
The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.00% per year in the future. The company's beta is 1.75, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P0?
1.Delta Ltd has just paid a dividend of $6 per share. If the dividends are expected...
1.Delta Ltd has just paid a dividend of $6 per share. If the dividends are expected to grow at a constant rate of 8% per year indefinitely, what will be the share price (to the nearest dollar) in 2 years- time, if investors require a return of 12%? A) $135 B) $189 C) $146 D) $126 2.A share currently sells for $28 a share. Its dividend is growing at a constant rate, and its dividend yield is 5 percent. The...
Wicked Textiles Inc. just paid its annual dividend of $2.50 per share. The dividends are expected...
Wicked Textiles Inc. just paid its annual dividend of $2.50 per share. The dividends are expected to grow for the next 2 years at 10% rate, and then slow down to a 4% annual rate forever. If investors require 15% return: 8) What is the terminal value of Wicked Textiles in Year 2 (P2)? Question 8 options: $17.52 $28.60 $25.04 $30.31 Question 9 (3.33 points) 9) What should be the current stock price of Wicked Textiles? Question 9 options: $26.30...
ABZ Corp. just paid a dividend of $1.00 per share. The dividend is expected to grow...
ABZ Corp. just paid a dividend of $1.00 per share. The dividend is expected to grow 6% per year in perpetuity.  The stock's beta is 0.85.  The risk-free rate is 3%, and the market risk premium is 7%. The current stock price is $37 per share.  Assume that one year from now the stock will be correctly valued. What are the dividend yield, capital gain yield and expected return for the coming year? Draw the Security Market Line and plot the stock on...
The Duo Growth Company just paid a dividend of $1.00 per share. The dividend is expected...
The Duo Growth Company just paid a dividend of $1.00 per share. The dividend is expected to grow at a rate of 23% per year for the next three years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 18% per year. a. What is your estimate of the intrinsic value of a share of the stock? (Use intermediate calculations rounded to 4 decimal places. Round your answer to 2 decimal...
The Timberlake Orchard Co just paid a dividend of $7 per share. The dividend is expected...
The Timberlake Orchard Co just paid a dividend of $7 per share. The dividend is expected to grow at a rate of 5% for the next three years. In year four and five it will grow at a rate of 4% per year. The growth rate of dividend is expected to be constant 6 percent indefinitely from year six. The required rate of return is 13 percent. What is the current share price? (Show all your computations) Rubrics: 1. Correct...
A company just paid a $2 dividend per share. The dividend growth rate is expected to...
A company just paid a $2 dividend per share. The dividend growth rate is expected to be 10% for each of the next 2 years, after which dividends are expected to grow at a rate of 3% forever. If the company’s required return (rs) is 11%, what is its current stock price?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT