Question

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 the 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.)

Answer 1

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

$0.55 = (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(1 + g)

            ke - g

Po = $0.55(1 + 0.1228)

                 0.137 - 0.1228

Po = $0.55(1.1228)

                   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.