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Stoneheart Group is expected to pay a dividend of $3.15 next year. The company's dividend growth rate is expected to be 4 percent indefinitely and investors require a return of 11.6 percent on the company's stock. What is the stock price?

Respuesta :

Shahzaibfaraz

Answer:

P0 = $41.44736842 rounded off to $41.45

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D1 / (r - g)

Where,

  • D1 is dividend expected for the next period /year
  • g is the growth rate
  • r is the required rate of return  

P0 = 3.15 / (0.116 - 0.04)

P0 = $41.44736842 rounded off to $41.45

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