Blue Mountain corporation will pay a dividend of $3.10 per share next year. The company pledges to increase its dividend by 3.8 percent per year indefinitely. If the required return to equity holders is 9%, what is the value of the company's stock today?Round your answer to two decimal places and do not include dollar signs.
Question
Blue Mountain corporation will pay a dividend of $3.10 per share next year. The company pledges to increase its dividend by 3.8 percent per year indefinitely. If the required return to equity holders is 9%, what is the value of the company's stock today?Round your answer to two decimal places and do not include dollar signs.
Solution
To calculate the value of the company's stock today, we can use the Gordon Growth Model (also known as the Dividend Discount Model). This model is used to determine the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is expected to be paid in the next time period, a growth rate for the dividends, and a required rate of return, the model is:
P = D1 / (r - g)
where: P = price of the stock today D1 = dividend expected next year r = required rate of return g = growth rate of dividends
In this case, D1 = $3.10, r = 9% or 0.09 (in decimal form), and g = 3.8% or 0.038 (in decimal form).
Substituting these values into the formula, we get:
P = $3.10 / (0.09 - 0.038)
Now, calculate the denominator (0.09 - 0.038) = 0.052
Then, divide the dividend by the result:
P = 59.62
So, the value of the company's stock today is approximately $59.62.
Similar Questions
The Bell Weather Company is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 18 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $1.80 per share. What is the current value of one share of this stock if the required rate of return is 7.30 percent?Multiple Choice$83.59$63.06$72.25$85.39$74.05
A share just paid a dividend of $0.60. The dividend is expected to increase at an annual rate of 4% forever. If the required return is 10%, what is a fair value of this share today? Group of answer choices $11.00 $6.24 $0.62 $10.00 $10.40
A company’s dividend is expected to grow at 20% for the next six years. After that, the growth is expected to be 3% forever. If the required return is 10%, what is the value of the stock at time 6? The dividend just paid was $1
The Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?
A company has been paying a $0.68 dividend and as it faces no growth opportunities it is expected that the dividend will not change in the future. If investors require a 24.98% return for this company, what is the share value. (Please round your answer to the nearest cent but exclude the $ sign when typing your answer.)
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.