the joseph company has a stock issue that pays a fixed dividend of 3.00 per share annually. Investors believe the normal rik-free rate is 4 percent and that this stock is 14 percent,and that this stock should have a risk premium of 6 percent
To determine the fair value of the stock issued by the Joseph Company, you need to calculate the present value of its dividends using the dividend discount model (DDM). The DDM formula is:
Stock price = Dividend / (Discount rate - Growth rate)
Given information:
Dividend (D) = $3.00 per share annually
Risk-free rate (Rf) = 4%
Stock's required rate of return (R) = 14%
Stock's risk premium (Rp) = 6% (which is the difference between the stock's required rate of return and the risk-free rate)
First, we need to calculate the discount rate (K) for the stock:
Discount rate (K) = Risk-free rate (Rf) + Risk premium (Rp)
K = 4% + 6%
K = 10%
Now, we can substitute the values into the DDM formula to calculate the stock price:
Stock price = $3.00 / (10% - Growth rate)
However, the growth rate (G) of the dividends is not given in the information. If we assume a constant growth rate, we can use the Gordon Growth Model to estimate it. The Gordon Growth Model is:
Growth rate (G) = Retained Earnings / Equity
Unfortunately, the retained earnings and equity information for the Joseph Company is not provided, so we cannot calculate the growth rate accurately.
Without the growth rate, we cannot determine the fair value of the stock. To get a precise valuation, we would need additional information, such as the growth rate or the expected future dividends of the Joseph Company.