27 Eco Company\'s common stock is expected to pay a $3.00 dividend in the upcomi

Question

27 Eco Company's common stock is expected to pay a $3.00 dividend in the upcoming year. The required rate of return for Eco Company common stock is 10%, and the expected growth rate of the dividend is 5% per year. What is the price per share for Eco Company common stock? All other parameters being the same, if the required rate of return increase to 12%, what will the new price per share be? All other parameters being the same, if the annual growth rate for the dividend increases to 7%, what will the new price per share be? All other parameters being the same, if this year's dividend is $3.50 per share, what will the new price per share be?

Explanation / Answer

Answer:
Price per share = D / (Ke - G)

= 3/ (0.10-0.05) = $60

If R.R = 12%

So, Price = 3 / 0.12-0.05 = $ 42.86 per share

If G = 7%

, So, 3 / 0.10-0.07 = $ 100 per share

If D = 3.50

Price = 3.50 / .10- .05 = $ 70 per share

Thanyou :)

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