Wayne Enterprises Inc.pays a regular annual dividend on its common shares which is expected to grow annually in perpetuity at the rate of 3%.Today is Dec 31 and Wayne pays its dividend on January 1 (tomorrow).Last year,the dividend was $0.75 per share.Ignoring settlement,taxes and other institutional issues,what is a fair price for the stock today if investors expect an annual return of 9%?

Question

Quizplus · Accepted Answer

Step 1 - Solve for D1 for use in the Gordon model. 11ea7fdb_fbee_adf6_a768_832feb9a2314_TB2902_11 = .75 × 11ea7fdb_fbee_d507_a768_a1b66327b9df_TB2902_11 = .7725 11ea7fdb_fbee_d508_a768_a1fa5ca00741_TB2902_11 = .7725 × 11ea7fdb_fbee_d509_a768_55b1bdcb7545_TB2902_11 = .795675
Step 2 - Use the Gordon model to solve for the stock price and add tomorrow's dividend. 11ea7fdb_fbee_d50a_a768_e340ce84830c_TB2902_11 = 11ea7fdb_fbee_d50b_a768_9792f83b12c1_TB2902_11 11ea7fdb_fbee_d50c_a768_69c1e76a6094_TB2902_11 = 11ea7fdb_fbee_d50d_a768_33ba1831de2e_TB2902_11 = $13.26
13.26 + .7725 = $14.03