Little Feet Shoe Co.just paid a dividend of $1.65 on its common stock.This company's dividends are expected to grow at a constant rate of 3% indefinitely.If the required rate of return on this stock is 11%,compute the current value of per share of LFS stock.

Question

Quizplus · Accepted Answer

Using the constant growth rate formula:
P0 = D1 / (r-g)
where,
D1 = expected dividend next year = $1.65 * (1 + 0.03) = $1.70
r = required rate of return = 11%
g = expected growth rate = 3%
P0 = 1.70 / (0.11 - 0.03) = $21.25
Therefore, the current value per share of LFS stock is $21.24, which is closest to option B.