Peach Company and Plum Corp

Finance Aug 10, 2020

Peach Company and Plum Corp. are in the same risk class. Peach pays a constant dividend of $5.50 per year, and is selling in the market for $42. Plum just paid a dividend of $4.00 per share. If Plum's dividends are growing at a constant rate of 9% per year, what is the market price of Plum stock?

Expert Solution

Computation of the market price of Plum stock:-

Required return = Dividend / Market price

= $5.50 / $42

= 13.10%

Current stock price = D1 / (Required return - Growth rate)

= $4 * (1 + 9%) / (13.10% - 9%)

= $4.36 / 4.10%

= $106.47

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