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Homework answers / question archive / The common stock of Big Birds Unlimited has a required return of 8 percent and a growth rate of 4 percent
The common stock of Big Birds Unlimited has a required return of 8 percent and a growth rate of 4 percent. The last annual dividend was $.60 a share. What is the current price of this stock?
$15.60
$15.00
$7.50
$7.80
$10.00
Answer:
The current price of the stock can be computed by using the following formula:
Current price = Current Dividend per share/(Required returns – Growth)
= $ .624/(0.08-0.04)
= $ 15.60
This concept of computing current price is rampantly used in finance. The last year dividend has to normalized to current year using the growth rate. Current year dividend per share = Last year dividend (1+ growth rate) = 0.60 (1+0.04) =$ 0.624
Hence, correct option is $ 15.60
