Question
Garlic Galore, Inc. just paid a quarterly dividend of $0.30. Future dividends are forecastto grow at 1% per quarter, forever. If the firm's equity cost of capital is 12% EAR, whatshould be the price of one share of stock?
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Answer to a math question Garlic Galore, Inc. just paid a quarterly dividend of $0.30. Future dividends are forecastto grow at 1% per quarter, forever. If the firm's equity cost of capital is 12% EAR, whatshould be the price of one share of stock?
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4.696 Answers
Current quarterly dividend, D0 = $0.30, Growth rate in dividends, g = 1% = 0.01,
Equity cost of capital, EAR = 12%
Effective quarterly rate, r = (1 + EAR)^(1/m) - 1
Where, m = Number of quarters a year = 4
r = (1 + 12%)^(1/4) - 1
r = 0.0287373447
The price of one share of stock is given by:
Price = D0 * (1 + g)/(r - g)
Using the values from above,
Price = 0.30 * (1 + 0.01)/(0.0287373447 - 0.01)
Price = 0.303/(0.0187373447)
Price = 16.170914548
Price = $16.17
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