Question

Question:BioScience Inc. will pay a common stock dividend of $3.20 at the end of the year (D1). The required return on common stock (Ke) is 14 percent. The firm has a constant growth rate (g) of 9 percent. Compute the current price of the stock (P0).

Short answer

Answer

The price of the stock is $64

Step-by-step solution

Given information:

Dividend at year end one (D1) is $3.20.

Growth rate (g) is 9%.

Required rate of return (Ke) is 14%.

Computation of Price of stock for part b

$$\begin{gathered} \mathbf{Price}\mathbf{}\mathbf{of}\mathbf{}\mathbf{stock}\mathbf{} \mathbf{\left(}\mathbf{P}\mathbf{0}\mathbf{\right)}\mathbf{=}\frac{\mathbf{D}\mathbf{1}}{\left(Ke-g\right)} \\ \mathbf{=}\frac{\mathbf{3}\mathbf{.}\mathbf{20}}{\left(\mathbf{0}\mathbf{.}\mathbf{14}\mathbf{-}\mathbf{0}\mathbf{.}\mathbf{09}\right)} \\ \mathbf{=}\mathbf{\$}\mathbf{64} \end{gathered}$$