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Red, Inc
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.95 next year. The growth rate in dividends for all three companies is 6 percent. The required return for each company's stock is 8.60 percent, 11.10 percent, and 15.80 percent, respectively.
Required:
(a) What is the stock price for Red. Inc., Company? (Click to select)$49.17$113.46$20.21$34.30$8.85
(b) What is the stock price for Yellow Corp. Company? (Click to select)$8.85$17.2526.58$57.84$49.17
(c) What is the stock price for Blue Company? (Click to select)$18.67$8.85$13.53$30.10$49.17
Expert Solution
a) $113.46
b)$57.84
c)$30.10
Step-by-step explanation
P = D/(R - g) where D is the dividend paid, R is the rate of return and g is the growth rate and P is the stock price
In this case, D = $2.95
g=6% = 0.06
a) For Red Inc, R is 8.6% = 0.086
P = $2.95/(0.086 - 0.06) = $113.46
b)For Yellow Corp R = 11.10% = 0.1110
P = $2.95/(0.1110 - 0.06) = $57.84
c) For Blue Corp, R = 15.80% = 0.1580
P = $2.95/(0.1580 -0.06) = $30.10
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