To determine: The current price of a share.
Introduction:
Stock price is a price of a share on the number of saleable stock of a company.
Answer to Problem 14QP
The current share price is $56.85.
Explanation of Solution
Given information:
GP Company has currently paid dividends of $3.20. The constant growth rate of dividends is 5%. The investor’s required
Formula to calculate the stock price of Year 6:
Where,
P6refers to the price of stock in 6 years
Dorefers to the dividend paid presently
R refers to the required return on the stock
g refers to the constant growth rate
n refers to the number of years
Note: The price of stock (P6) will be the dividend in Year 7.
Formula to calculate the stock price of Year 3:
Where,
P3 refers to the price of the stock in Year 3
D1…Dn refers to the next period expected dividend per share
R refers to the required rate of return on its stock
g refers to the constant growth rate
Note: At the time when the required return changes frequently, the stock price in Year 3 will be the present value of the dividends in Year 4, Year 5, and Year 6 plus the present value of stock of Year 3.
Formula to calculate the current price of the share:
Where,
Porefers to the present price of a stock
D1…Dn refers to the next period expected dividend per share
R refers to the required return on the stock
g refers to the constant growth rate
Compute the stock price of Year 6:
Hence, the stock price of Year 6 is $75.04.
Compute the stock price of Year 3:
Hence, the stock price of Year 3 is $61.62.
Compute the current price of the share:
Hence, the current price of the share is $56.85.
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Chapter 8 Solutions
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