Please example to me how you get D1 because to figure out the P0 you need to get
ID: 2613829 • Letter: P
Question
Please example to me how you get D1 because to figure out the P0 you need to get the D1 and I came up with 1.356 but it doesn't give me the right answer. PLEASE show me each step in figuring out the price of stock. SORRY I have finance but I am required ot take this course so I am trying to understand.
Maxwell Communications paid a dividend of $1.20 last year. Over the next 12 months, the dividend is expected to grow at 15 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 22 percent.
Compute the price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Maxwell Communications paid a dividend of $1.20 last year. Over the next 12 months, the dividend is expected to grow at 15 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 22 percent.
Explanation / Answer
Solution: The price of the stock (P0) = $19.71 per share Working Notes: Using Gordon growth model : P0 = D1 / (Ke - g), where D1 = D0(1+g) rate of return (Ke) = 22% Po=current share price = ?? g= growth rate= 15% D0=last year Dividend=$1.20 per share P0 = D1 / (Ke - g) P0 = D0(1+g)/(Ke -g) P0 = 1.2(1+0.15)/(0.22 -0.15) P0 = $1.38/0.07 P0 = 19.7142857 P0 = $19.71 per share Notes: For your understanding: D1 = next dividend = Current dividend(D0) x (1+growth rate) D1 = $1.20 x (1+15%) D1 = $1.20 x (1+0.15) D1 = $1.38. Please feel free to ask if anything about above solution in comment section of the question.