Constant growth: Reco Corp. is expected to pay a dividend of $2.25 next year. The forecast for the

QUESTION

Constant growth: Reco Corp. is expected to pay a dividend of $2.25 next year. The forecast for the stock price a year from now is $37.50. If the required rate of return is 14 percent, what is the current stock price? Assume constant growth.
The
market price of the stock in case of constant dividend growth rate can be
calculated as follows: Market price of stock after 1 year = (Dividend expected to be paid next year * (1+growth rate))/ (Required rate of return growth
rate) $ 37.50 = ($ 2.25 * (1+ g) /(14% g) 5.25 37.5 g =2.25 + 2.25 g 5.25 2.25 = 37.5

g + 2.25 g 3 = 39.75 g g = 7.55% Current stock price = Dividend to be paid at the end of 1 year / ( Required rate of return growth rate ) Current stock price = $ 2.25 / (14% 7.55%) Current stock price = $ 34.88

ANSWER:

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