A firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk involvements. The value of the firm's common stock is _________ .

Question

Quizplus · Accepted Answer

Using the constant growth formula: 
P0 = D1/(r-g) 
where 
D1 = expected dividend per share next year = $2.70 
r = required rate of return = 12% 
g = growth rate of dividends = 9%

P0 = $2.70/(0.12-0.09) = $90

Therefore, the value of the firm's common stock is $90 per share.

A Firm Has Experienced a Constant Annual Rate of Dividend