Round Barn stock has a required return of 900 and is expecte

Round Barn stock has a required return of 9.00% and is expected to pay a dividend of $4.15 next year. Investors expect a growth rate of 5.10% on the dividends for the foreseeable future a. What is the current fair price for the stock? (Round your answer to 2 decimal places.) Current fair price b. Suppose the stock is selling at this price, but then investors revise their expectations. The new expectation for the growth rate is 4.60%. If investors are rational, what will be the new price for Round Barn stock? (Round your answer to 2 decimal places.) New price

Solution

a.Current price=D1/(Required return-Growth rate)

=4.15/(0.09-0.051)

=$106.41(Approx)

b.New price=$4.15/(0.09-0.046)

which is equal to

=$94.32(Approx).