Staal Corporation will pay a $3.40 per share dividend next year. The company pledges to increase...

Question:

Staal Corporation will pay a $3.40 per share dividend next year. The company pledges to increase its dividend by 4.5%t per year indefinitely.

If Peter requires a return of 11% on his investment, how much will he pay for the company's stock today?

Dividend next year = 3.40

Dividend growth rate = 4.50%

Required return = 11%

Valuation of Stock:

There are various models to calculate the current value of stock and one of them is the dividend growth model. In the dividend growth model, three variables (dividend amount, the growth rate of dividend, and the expected return of the investor) are taken to arrive off the projected stock price as on date.

Answer and Explanation:

The information required to calculate the company stock is as follows

  • The dividend to be paid next year is $3.40
  • The Dividend growth rate is 4.50%
  • The required a return of 11%

The formula for dividend growth model will be used to calculate the stock price today

Sp= D1 / (Rm - G)

Where

Sp = stock price as on today

D1 = dividend to be paid next year

Rm= required a rate of return

G= growth rate of dividend

Substituting the numbers in the formula

Sp= 3.40 / (0.11 - 0.045)
= 3.40 / 0.065
= 52.31

Peter will he pay $52.31 for the company's stock today


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.5K

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