• Emerson Electric common stock that is selling for $80 with a par value of $5. This stock recently paid a $2.10 dividend, and the firm’s earnings per share have increased from $2.40 to $4.48 in the past 5 years. An equivalent amount of growth in the dividend is expected.

Required rate of return is 15%

What is value of common stock?

Do you have a question about the previous answers you received to this question?

http://www.jiskha.com/display.cgi?id=1268470497

To calculate the value of the common stock, we can use the Dividend Discount Model (DDM) formula. The DDM calculates the present value of all future dividends to determine the fair value of a stock.

The DDM formula is as follows:
Value of Stock = Dividend / (Required Rate of Return - Dividend Growth Rate)

Given information:
- Stock Price (Selling Price): $80
- Par Value: $5
- Dividend: $2.10
- Earnings per Share (EPS) growth rate: From $2.40 to $4.48 in the past 5 years
- Expected growth rate of dividends: Equivalent to EPS growth rate

First, let's calculate the dividend growth rate:
Dividend growth rate = (Current EPS - Previous EPS) / Previous EPS
= ($4.48 - $2.40) / $2.40
= $2.08 / $2.40
= 0.8667 or 86.67%

Next, we need to determine the required rate of return, which is given as 15%.

Using the DDM formula:
Value of Stock = $2.10 / (0.15 - 0.8667)
= $2.10 / (-0.7167)
= -2.9236

Based on these calculations, the value of the common stock is approximately -$2.9236. However, it's important to note that a negative value suggests the stock is overvalued or has some assumptions that do not match market conditions. Double-check the calculations and ensure that the growth rate and required rate of return are accurate.