Wombat+Wombat is a well-established creative design agency located on the East C

Question

Wombat+Wombat is a well-established creative design agency located on the East Coast. It has experienced very stable growth in both earnings and dividends over the past 10 years, averaging 7% per annum. Dividends are typically paid at the end of each year, the most recent dividend of $3.00 per share having just been paid to shareholders.

If this growth in dividends is expected to continue into the foreseeable future, how much would an investor be willing to pay per share of Wombat+Wombat common stock if they require a return of 18% per annum on investments of this risk?

Explanation / Answer

Given:-

g = 7%

D0 = $3 per share

D1 = 3*(1.07)

= $3.21 per share

Re = 18%

P0 = ?

..

As per Constant Growth DDM,

P0 = D1/(Re-g)

P0 = 3.21/(0.18-0.07)

P0 = 3.21/0.11

P0 = $29.18 per share ....Ans

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.