Question 9 20 pts TCO D A stock has just paid a dividend has

Question 9 20 pts (TCO D) A stock has just paid a dividend has declared an annual dividend of $15.00 to be paid one year from today. The dividend is expected to grow at a 7% annual rate. The retum on equity for similar stocks is 15%. What is Po? (Show workings) HTML Editor Paragraph

Solution

Current Stock Price [P0] = $200.63

Growth Rate (g) = 7%

Return on Equity [Ke] = 15%

Current Year Dividend (D0) = $15.00

Next Year Dividend (D1) = D0 x [1+g] = $15.00 x 1.07 = $16.05 per share

Current Stock Price [P0] = D1 / [ Ke – g ]

= $16.05 / [ 0.15 – 0.07 ]

= $16.05 / 0.08

= $200.63