A firm just paid a dividend of $4.30. The dividend is expected to grow at a constant rate of 2.68% forever and the required rate of return is 14.75%. What is the value of the stock?

The value of the stock is $36.53

Explanation:

To calculate the value of the stock, we'll use the formula

......(a)

where, P = price of stock

D1 = Estimated dividend for next period

r = required rate of return

g = growth rate

First we will calculate D1,

Do is the dividend whic the firm just paid = $4.30

D1 = Do(1+g)

D1 = 4.30(1+2.68)

D1 = $4.41

Substituting the values in the formula....(a)

P = 4.41 / (14.75% - 2.68%)

P =  4.41 / 12.07%

P = $36.53

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