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Gentleman Gym just paid its annual dividend of $4 per share, and it is widely expected that the dividend will increase by 5% per year indefinitely.

Requried:
a. What price should the stock sell at if the discount rate is 15% (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What price should the stock sell at if the discount rate is 12%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Respuesta :

Kolawole845

Answer:

a) Price of stock = $42

b) Price of stock = $60

Explanation:

The price of a share can be calculated using the dividend valuation model  

According to this model the value of share is equal to the sum of the present values of its future cash dividends discounted at the required rate of return.

If dividend is expected to grow at a given rate , the value of a share is calculated using the formula below:

Price=Do (1+g)/(k-g)

Where Do- Dividend now, g- growth rate, k- required rate of return(cost of equity)

a) Where discount rate is 15%

Price of stock = 4× (1.05)/(0.15-0.05) = 42

Price of stock = $42

b) Where discount rate is 12%

Price of stock =4× (1.05)/(0.12-0.05)= 60

Price of stock = $60

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