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Chapter 4: Q30BP (page 326)

Question:Maxwell Communications paid a dividend of $3 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 14 percent. Compute the price of the stock (P0)

Short Answer

Expert verified

Answer

The price of the stock is$54

Step by step solution

01

Computation of growth rate

ExpectedDividend(D1)=PriorDividend×1+GrowthRate=3×1+0.08=$3.24

02

Computation of stock price (P0)

Priceofstock(P0)=D1Requiredrateofreturn-GrowthRate=3.240.14-0.08=$54

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