Analysts forecast Krogers growth rate to be 925 percent in t

Analysts forecast Kroger’s growth rate to be 9.25 percent in the future. Their most recent dividend was $.95. What is the value of Kroger\'s stock when the required return is 12.50 percent? If the current price of Kroger were $25.00, would you purchase this stock? Explain your answer.

Solution

Growth rate = g = 9.25% = 0.0925

Most recent dividend = D0 = $0.95

Next dividend = D1 = D0*(1+g) = $0.95*1.0925 = $1.038

Required return = r = 12.50% = 0.125

Fair value of stock = D1/(r-g) = $1.038/(0.125-0.0925) = $31.93

Since the current price of the share is less than its fair value, it is advisable to purchase the stock.