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Value a Constant Growth Stock Financial analysts forecast Wal-Mart Stores (WMT) growth for the...

Question:

Value a Constant Growth Stock Financial analysts forecast Wal-Mart Stores (WMT) growth for the future to be 14,00 percent. Their recent dividend was $2.43 What is the value of their stock when the required rate of return is 16,00 percent?

  1. A. $1.3851
  2. B. $138.51
  3. C. $121.50
  4. D. $1.2150

Stock Valuation:

The price of a stock may be equal to, less than or more than the intrinsic value of the stock. If the price is more than the intrinsic value, it is called as overvalued stock and if it is vice-versa, it is called as under-valued stock. The intrinsic value may be derived by using models such as dividend discount model, discounted cash flow model etc.

Answer and Explanation:

The calculated value of the selling price of the stock for today is option B. $138.51.

The value of the dividend to be paid in the next year is given by:

  • = Dividend just paid * (1 + growth rate)
  • = $2.43 * (1 + 14%)
  • = $2.43 * 1.14
  • = $2.77

The value of the stock as of today is given by:

  • = Dividend to be paid next year / (required rate of return - constant growth rate)
  • {eq}= \dfrac{\$2.77}{(16\% - 14\%)} {/eq}
  • {eq}= \dfrac{\$2.77}{2\%} {/eq}
  • = $138.51

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.8K

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