A firm reported that it paid dividends of $0

Finance Jan 15, 2021

A firm reported that it paid dividends of $0.70 a share this year. A financial analyst has determined that
the firm’s growth rate in dividends will continue at its historical rate of 8% a year indefinitely and has
estimated that an investorshould require a 20% return on the firm’sstock, based on itsriskiness. What
is the fair market price of the stock that is implied by his estimates?

Expert Solution

Last Dividend = $0.70
Growth Rate = 8.00%
Required Return = 20.00%

Expected Dividend = Last Dividend * (1 + Growth Rate)
Expected Dividend = $0.70 * 1.08
Expected Dividend = $0.756

Current Price = Expected Dividend / (Required Return - Growth Rate)
Current Price = $0.756 / (0.20 - 0.08)
Current Price = $0.756 / 0.12
Current Price = $6.30

Therefore, fair market price of the stock is $6.30

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote