Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie board of directors declared a dividend of $1.85 yesterday. What should a share of Charlie Company sell for?
Using the Gordon growth model, we can find the value of the stock.
P = D / (r - g)
P = $1.85 / (0.11 - 0.06)
P = $37.
Therefore, a share of Charlie Company should sell for $37.
To find the price at which a share of Charlie Company should sell for, we can use the Dividend Discount Model (DDM), which calculates the intrinsic value of a stock based on its expected dividend payments. The formula for DDM is:
Price = Dividend / (Return - Growth)
In this case, the annual dividend (Dividend) declared by the board of directors is $1.85, the return on similar stocks (Return) is 11%, and the growth rate (Growth) is 6%.
Let's substitute these values into the formula:
Price = $1.85 / (0.11 - 0.06)
Price = $1.85 / 0.05
Price = $37
Therefore, a share of Charlie Company should sell for $37 based on the Dividend Discount Model.