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9 May, 08:16

Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock?

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Answers (2)
  1. 9 May, 10:07
    0
    The answer is $80.20

    Explanation:

    This can be gotten through what will call Dividend Discount Model. It is one of the methods to determine the price of a company's stock.

    The formula is:

    Ke = D1/Po + g

    Where D1 is the future dividend payment

    Po is the present value of the stock

    g is the growth rate

    Ke is the cost of equity

    D1 = $4.45 x 1.08 = $4.81

    Ke = 0.14

    g = 0.08

    Therefore, Po = $4.81/0.14 - 0.08

    =$4.81/0.06

    =$80.20
  2. 9 May, 10:51
    0
    Current stock price is $80.10

    Explanation:

    Current price of stock = Do * (1+g) / r-g

    Do is the dividend that has just been paid of $4.45

    g is the growth rate of dividend at 8%

    r is the investor's expected rate of return of 14% also known as discount rate

    Current price of stock=$4.45 * (1+8%) / 14%-8%

    =$4.45*1.08/6%

    =4.806 / 6%

    =$80.10

    The current price of the stock of Johnson corporation is $80.10 since a rational investor prices a stock at a price that reflects the dividend capacity of the stock in the future
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