A publicly traded firm just paid out a dividend (assume t=0 on the timeline) of $4/share, so this cash has been paid out and is no longer part of the firm's value and stock price

Finance Sep 11, 2020

A publicly traded firm just paid out a dividend (assume t=0 on the timeline) of $4/share, so this cash has been paid out and is no longer part of the firm's value and stock price. This firm is expected to make dividend payments forever.

Calculate/estimate the current price or value per share of this stock if its equity cost of capital or required return is r=10% per year, and the dividends will increase or grow at a constant annual rate of g=4%/year forever?

Expert Solution

Computation of the current stock price:-

Current stock price = D1 / (Cost of capital - Growth rate)

= $4 * (1 + 4%) / (10% - 4%)

= $4.16 / 6%

= $69.33

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