ABC Inc. just paid a dividend of $1.00 this year. The stock price is $15.43 currently. The market risk premium is 15% and the risk-free rate is 6%. What will the price of ABC's stock be if the dividend growth increases by 25%?

Question

Business

Lisa Rubio

13 May, 09:57

ABC Inc. just paid a dividend of $1.00 this year. The stock price is $15.43 currently. The market risk premium is 15% and the risk-free rate is 6%. What will the price of ABC's stock be if the dividend growth increases by 25%?

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Answers (1)

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Camille Key · Answer 1

Price lowers and becomes negative or - 5.37 dollars

Explanation:

Market risk premium's formula could be written as dividends/price + dividend's growth rate. Therefore, we dividend growth rate according to the current price and dividend level equal to market risk premium - dividends/price or 0.15 - 1/15.43 = 0.086 or 8.6%. If the dividend growth rate rises by 25% than new one is 33.6%. Price is equal to dividends/market risk premium - dividend growth rate or in this case 1/0.15-0.336 or 1/-0.186 or - 5.37 dollars. If the price is negative that would mean that any future selling of the stock would mean that ABC would have to pay in order to sell it.