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Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (that is, D1 = $0.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the stock’s current value per share?

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Answer:

 CurrentStock Value per Share (P0) = $6.25

Explanation:

Dividend growth rate (g) = 7% per year

Expected Dividend   (D1) = $0.50

Required return rate   (R) = 15%

           CurrentStock Value (P0) = D1 / (R-g)

                                            P0 = $0.50 / (0.15 – 0.07)

                                                 = $0.50 / 0.08

                                                = $6.25

                                CurrentStock Value per Share (P0) = $6.25