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You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock? (Round to the nearest dollar.)

Respuesta :

Shahzaibfaraz

Answer:

The fair value of the stock under constant growth model is $60.95. This is the most that should be paid for the stock today.

Explanation:

The price of the stock for a company having constant dividend growth can be calculated using the constant growth model of DDM. The formula for the constant growth model is:

P0 or price today = D0 * (1+g)  /  r - g

Where,

  • D0 * (1+g) is the dividend expected for the next period or D1.
  • r is the required rate of return
  • g is the growth rate in dividends

P0 = 2.3 * (1+0.06)  /  (0.1 - 0.06)

P0 = $60.95

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