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Price of Common Stock

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If your company pays a dividend of 2.00 last year. Growth rate is expected to be 4 percent for 1 year, 5 percent the next year, the 6 percent the following year, and then be a constant 7 percent thereafter. The required rate of return on equity is 10 percent. Solve the price of common stock knowing the answer is 67.47.

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Solution Summary

The solution explains the calculation of the price of common stock using the dividend discount model.

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The price of common stock is the present value of all dividends. Once the growth rate is constant, we use the constant growth formula to find the present value. For the other years, we discount the dividends to get the ...

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