A stock is expected to pay a dividend of $1.06 at the end of the year....

A stock is expected to pay a dividend of $1.06 at the end of the year. The dividend is expected to grow at a constant rate of 7.7%. The required rate of return is 10.3%. What is the stock's current price?

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

Expert Solution

Solution:-

Current price of the stock using dividend discount model

Price = D₁ / (r -g)

where D1 = expected dividend

r = required rate of return

g = growth rate

Price = $1.06 / (10.3% - 7.7%)

= $1.06 / (0.103 - 0.077)

= $1.06 / 0.026

= $40.76

Hence the stock's current price is 40.76 ( rounded of to two decimals and $ not entered)

jeff jeffy answered 2 years ago

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