Boehm Incorporated is expected to pay a $2.70 per share dividend at the end of this year (i. e., D1 = $2.70). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock, rs, is 10%. What is the estimated value per share of Boehm's stock? Do not round intermediate calculations. Round your answer to the nearest cent.

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Business

Wade Huffman

22 July, 16:35

Boehm Incorporated is expected to pay a $2.70 per share dividend at the end of this year (i. e., D1 = $2.70). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock, rs, is 10%. What is the estimated value per share of Boehm's stock? Do not round intermediate calculations. Round your answer to the nearest cent.

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Answers (1)

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George Lynn · Answer 1

The expected value per share today is $54

Explanation:

The price or expected value of a stock whose dividends are expected to grow at a constant rate can be calculated using the constant growth model of the DDM or dividend discount model. The DDM bases the value of a stock on the present value of the expected future dividends from the stock. The formula for price under this model is,

P0 = D1 / r - g

Where,

D1 is the dividend for the next period r is the cost of equity or rate of return g is the growth rate in dividends

P0 = 2.7 / (0.1 - 0.05)

P0 = $54