Von Bora Corporation (VBC) is expected to pay a $ 3.50 dividend at the end of this year. If you expect VBC's dividend to grow by 5 % per year forever and VBC's equity cost of capital is 10 %, then the value of a share of VBS stock is closest to:

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Business

Mayra

12 March, 21:31

Von Bora Corporation (VBC) is expected to pay a $ 3.50 dividend at the end of this year. If you expect VBC's dividend to grow by 5 % per year forever and VBC's equity cost of capital is 10 %, then the value of a share of VBS stock is closest to:

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Answers (1)

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Emery Morris · Answer 1

The answer is $70

Explanation:

Here, the formula to be used is called Dividend Discount Model. It is one of the ways to determine the cost of equity.

The formula is:

Ke = D1/Po + g

Ke is the cost of Equity

D1 is the next year dividend

Po is the present value of the equity (stock)

g is the growth rate.

Ke = 10percent

D1 = $3.5

Po = ?

g = 5percent

0.1 = 3.5/Po + 0.05

Po = 3.5 / (0.1-0.05)

Po = $70