share will increase at a rate of Troy is interested in buyin

share will increase at a rate of Troy is interested in buying a particular stock whose current dividend per share is $1.15. Troy estimates that the current dividend per 2.75% per year o e er f Tro s estimates are corect, what is the best estimate of the stock price per sha ette equi edate fear is 13.00% Place your answer in dollars and cents. Do not place a dollar sign or comma in your answer

Solution

When dividend grow at fixed rate forever, then share price is estimated with the below mentioned formula. The calculation of estimated share price per share is shown as follows:-

Stock price per share = Dividend per share/(Rate of return-Growth per year)

= $1.15/(13%-2.75%)

= $1.15/10.25% = $1.15/0.1025 = $11.22 per share

Therefore the best estimate of the stock price per share if the required rate of return is 13.00% is $11.22 per share.