Perrine Industrial Inc just paid a dividend of 5 per share F

Perrine Industrial Inc. just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 16%? A.59.44 B.65.87 C.55.56 D.33.44

Solution

Solution:

Option A is the correct answer.

Check below for the detailed answer with explanation.

The calculated price is based on the dividend growth model, which assumes that the dividends will always be paid and they will grow at a constant rate indefinitely.

How to Calculate the Value of Stocks

To determine the value of a common stock using the dividend growth model, you first determine the future dividend by multiplying the current dividend by the decimal equivalent of the growth percentage (dividend x (1 + growth rate)).

future dividend= (dividend x (1 + growth rate)

Given current dividend is $5 per share,growth rate =7% per year

                 =5*(1+0.07)

                   =5*1.07

                   = $5.35

Lastly, the future dividend is divided by the difference between the decimal equivalent of expected rate of return and the decimal equivalent of the growth percentage (future dividend ÷ (expected rate of return - growth rate)).

value of the stock =(future dividend ÷ (expected rate of return - growth rate))

Given expected rate of return =16% =0.16

and growth rate=7% =0.07

                            =5.35/(0.16-0.07)

            value of stock     = $59.44 per share

Based on a current dividend price of $5.00 and a growth rate of 7.000%, in order to earn your 16.000% required rate of return the most you could pay for this stock would be $59.44 per share.