Continental Airlines just paid a dividend of $0.65. It is expected to increase its dividend by 1.55% per year. If the market's return on assets of this risk level is 12%, how much should the stock be selling for?Group of answer choices$6.32$6.22$5.42$5.98
Question
Continental Airlines just paid a dividend of 6.325.42$5.98
Solution
To solve this problem, we can use the Gordon Growth Model (also known as the Dividend Discount Model), which is a method used in finance to calculate the intrinsic value of a stock, exclusive of current market conditions. The model assumes that dividends grow at a constant rate indefinitely.
The formula for the Gordon Growth Model is:
P = D1 / (k - g)
where: P = price of the stock D1 = expected dividend in the next year k = required rate of return g = growth rate of dividends
Given in the problem: D0 (current dividend) = $0.65 g (growth rate) = 1.55% or 0.0155 in decimal form k (required rate of return) = 12% or 0.12 in decimal form
First, we need to calculate D1, the expected dividend in the next year. This can be calculated as:
D1 = D0 * (1 + g) D1 = 0.66 (rounded to the nearest cent)
Now we can substitute D1, k, and g into the Gordon Growth Model to find the price of the stock:
P = D1 / (k - g) P = 6.32
So, the stock should be selling for approximately $6.32.
Similar Questions
This year, Hope Corporation just paid a dividend of $0.50 per share. The company expect dividends to increase dividends at an annual rate of 3.5% forever. If investors require a return of 12%, what is the value of a Hope Corporation share today? Group of answer choices $6.09 $5.88 $4.17 $0.50 $6.59
A share just paid a dividend of $0.60. The dividend is expected to increase at an annual rate of 4% forever. If the required return is 10%, what is a fair value of this share today? Group of answer choices $11.00 $6.24 $0.62 $10.00 $10.40
The Bell Weather Company is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 18 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $1.80 per share. What is the current value of one share of this stock if the required rate of return is 7.30 percent?Multiple Choice$83.59$63.06$72.25$85.39$74.05
Noel Company's common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? A. $15.00 B. $22.22 C. $23.33 D. $40.00
A company has been paying a $0.68 dividend and as it faces no growth opportunities it is expected that the dividend will not change in the future. If investors require a 24.98% return for this company, what is the share value. (Please round your answer to the nearest cent but exclude the $ sign when typing your answer.)
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.