Constant growth: Moriband Corp. paid a dividend of $2.15 yesterday. The company's dividend is expected to grow at a steady rate of 5 percent for the next several years. If stocks of companies like Moriband require a rate of return of 15 percent, what should be the market price of Moribund stock?

Question

Business

Purdy

6 August, 08:12

Constant growth: Moriband Corp. paid a dividend of $2.15 yesterday. The company's dividend is expected to grow at a steady rate of 5 percent for the next several years. If stocks of companies like Moriband require a rate of return of 15 percent, what should be the market price of Moribund stock?

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Answers (1)

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Hayley Key · Answer 1

The market price of moribund stock is $22.58

Explanation:

Let,

Dividend = D0 = $2.15

Growth rate = g = 5%

rate of return = R = 15%

Market price = P0 = D1 : (R - g)

= D0 (1 + g) : (R - g)

= $2.15 (1 + 0.05) : 0.15 - 0.05

= $2.15 (1.05) : 0.1

= $2.2575 : 0.1

= $22.575

Approximately $22.58

The market price for moribund stock is $22.58