General Cereal common stock dividends was $0.79 in 2000 and the last dividend paid was $1.55 per share in 2010. Dividends are expected to continue growing at the historic rate for the foreseeable future.
What is the General Cereal’s current value of a share of this stock to an investor who requires a 12 percent rate of return ?(5)
What is the current share price of General Cereal?
However, it's highly unlikely that it will provide a 12% annual return.
MS. SUE, THE CURRENT SHARE PRICE WAS NOT GIVEN!
The rate of return is based on the price the shareholder pays for the stock.
Please check with your teacher to see what is expected.
To calculate the current value of a share of General Cereal's stock, we can use the dividend discount model (DDM). The DDM states that the value of a stock is equal to the present value of all its future dividends.
First, let's calculate the annual growth rate of dividends. We can use the formula:
Annual Growth Rate = (Dividend in 2010 / Dividend in 2000) ^ (1 / Number of Years) - 1
Annual Growth Rate = ($1.55 / $0.79) ^ (1 / 10) - 1
Annual Growth Rate = 0.0837 or 8.37%
Next, we need to calculate the expected dividend in the next year. We can use the formula:
Expected Dividend in Year 1 = Dividend in 2010 * (1 + Annual Growth Rate)
Expected Dividend in Year 1 = $1.55 * (1 + 0.0837)
Expected Dividend in Year 1 = $1.68
Now, we can calculate the value of the stock using the DDM formula:
Value of Stock = Dividend in Year 1 / (Rate of Return - Annual Growth Rate)
Value of Stock = $1.68 / (0.12 - 0.0837)
Value of Stock = $1.68 / 0.0363
Value of Stock = $46.26
Therefore, the current value of a share of General Cereal's stock to an investor who requires a 12 percent rate of return is approximately $46.26.