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Brrunno [24]
2 years ago
7

Waller Co. paid a $0.137 dividend per share in 2000, which grew to $0.55 in 2012. This growth is expected to continue. What is t

he value of this stock at the beginning of 2013 when the required return is 13.7 percent? (Round the growth rate, g, to 4 decimal places. Round your final answer to 2 decimal places.)
Business
1 answer:
Elena L [17]2 years ago
7 0

Answer:

Dividend in year 2000 (Do) = $0.137

Dividend in year 2012 (D12) = $0.55

Required return (Ke) = 13.7% = 0.137

D12 = Do(1 + g)n

$0.55 = $0.137(1 + g)12

<u>$0.55</u> = (1 + g)12

$0.137

4.0146 = (1 + g)12

12√4.0146 - 1 = g

1.1228 - 1 = g

g = 0.1228 = 12.28%  

Po = Do<u>(1 + g) </u>

            ke - g

Po = $0.55<u>(1 + 0.1228) </u>

                 0.137 - 0.1228

Po = $0.55<u>(1.1228) </u>

                   0.0142  

Po = $43.49  

Explanation:

In this case, we need to calculate the growth rate using the formula D12 = Do(1 + g)12. Then, we will calculate the current market price, which is a function of current dividend paid, subject to growth rate, divided by the excess of cost of equity over growth rate.

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