ABC, Inc. just paid a dividend of $1.2. The dividends are expected to grow at 5.09%...

ABC, Inc. just paid a dividend of $1.2. The dividends are expected to grow at 5.09% each year forever. The required rate of return on the stock is 24.79%. What is today's price of the stock?

Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box.

Solutions

Expert Solution

When the cash flows are received forever, it is called as perpetuity, a growing perpetuity in this case.

Present value (Price of stock) of a growing perpetuity is given by,

PV =

where D1 is dividend next year

D1 = D0*(1+g)

where D0 is dividend just paid = 1.2

r is required rate of return or interest rate = 24.79%

g is growth rate = 5.09%

Therefore, PV =

= 1.2611/0.197

= 6.40

jeff jeffy answered 2 years ago

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