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Next year, Jensen's will pay an annual dividend of $3.32 per share. The company has been reducing its dividends by 7 percent annually. What is this stock worth today if the required return is 15.5 percent

Respuesta :

Shahzaibfaraz

Answer:

P0 = $14.7556 rounded off to $14.76

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D1 / (r - g)

Where,

  • D1 is dividend expected for the next period
  • g is the growth rate
  • r is the required rate of return  

As the growth rate is negative, we will enter negative g in the formula, so the formula will be,

P0 = D1 / (r - (-g))

P0 = 3.32 / (0.155 - (-0.07))

P0 = $14.7556 rounded off to $14.76

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