Using 7.86 rate of return , what should be the current share price of AirJet Best Parts, Inc. if the company maintains a constant 1% growth rate in dividends and the most recent dividend per share paid on the stock was $1.50?
To calculate the current share price of AirJet Best Parts, Inc., we can use the Dividend Discount Model (DDM). The DDM calculates the present value of all expected future dividends.
First, let's determine the growth rate of dividends. We are given that the company maintains a constant 1% growth rate in dividends. Therefore, the annual dividend growth rate (g) is 1% or 0.01.
Next, we need to determine the required rate of return (r). We are given that the rate of return is 7.86%. We can use this as the required rate of return (r).
Now, let's use the DDM formula to calculate the current share price:
Current Share Price = Dividend per Share / (Required Rate of Return - Dividend Growth Rate)
Dividend per Share = $1.50
Required Rate of Return (r) = 7.86% or 0.0786
Dividend Growth Rate (g) = 1% or 0.01
Using the formula:
Current Share Price = $1.50 / (0.0786 - 0.01)
= $1.50 / 0.0686
= $21.88
Therefore, the current share price of AirJet Best Parts, Inc. should be $21.88.