A firm has experienced a constant annual rate of dividend growth of 7 percent on its common stock and expects the dividend per share in the coming year to be $2.40. The required rate of return on the stock is 12 percent. The value of the firm's common stock is ________.

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ajeigbeibraheem ajeigbeibraheem · Answer 1 · 2020-12-10T15:58:00+01:00

Answer:

The value of the firm's common stock is $48

Explanation:

The constant dividend growth model is used to determine the market value of the share and which can be expressed as:

[tex]P = \dfrac{D}{r-g}[/tex]

here;

the value of the current market price of the share (P) = unknown?

The dividend expected in the next year (D) = $2.40

The required rate of return (r) = 12% = 0.12

The growth rate (g) = 7& = 0.07

Replacing the values into the above equation:

[tex]P = \dfrac{2.40}{0.12-0.07}[/tex]

[tex]P = \dfrac{2.40}{0.05}[/tex]

P = $48