Question

Von Bora Corporation​ (VBC) is expected to pay a $ 3.50 dividend at the end of this year. If you expect​ VBC's dividend to grow by 5​% per year forever and​ VBC's equity cost of capital is 10​%, then the value of a share of VBS stock is closest​ to:

Answer 1

Answer:

The answer is $70

Explanation:

Here, the formula to be used is called Dividend Discount Model. It is one of the ways to determine the cost of equity.

The formula is:

Ke = D1/Po + g

Ke is the cost of Equity

D1 is the next year dividend

Po is the present value of the equity(stock)

g is the growth rate.

Ke = 10percent

D1 = $3.5

Po = ?

g = 5percent

0.1 = 3.5/Po + 0.05

Po = 3.5/(0.1-0.05)

Po = $70