Problem 8-9 Stock Valuation and Required Return [LO1] Red, Inc., Yellow Corp., a
ID: 2778171 • Letter: P
Question
Problem 8-9 Stock Valuation and Required Return [LO1]
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.10 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s stock is 7 percent, 10 percent, and 13 percent, respectively. What is the stock price for each company? (Round your answers to 2 decimal places. (e.g., 32.16))
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.10 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s stock is 7 percent, 10 percent, and 13 percent, respectively. What is the stock price for each company? (Round your answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Stock price = D1÷(r-g)
D1 is next expected dividend
r is cost of common stock
g is growth rate
Red inc.:
= $3.1÷(7%-4%)
= $103.33
Yellow corp.:
= $3.1÷(10%-4%)
=$51.67
Blue company:
= $3.1÷(13%-4%)
= $34.44