Question

Sheridan Corp. paid a dividend of $2.30 yesterday. The company's dividend is expected to grow at a steady rate of 5 percent for the foreseeable future. If investors in stocks of companies like Sheridan require a rate of return of 15 percent, what should be the market price of Sheridan stock? (Round dividend to 3 decimal places, e.g. 3.756 and round final answer to 2 decimal places, e.g. 15.25.) Market price $ _________

Answer 1

Answer:

$24.15

Explanation:

The formula for determining is the present value of a cash flow in perpetuity provided below:

share price=last dividend*(1+terminal dividend growth rate)/(required rate of return-terminal dividend growth rate)

last dividend=$2.30

terminal dividend growth rate=5%

required rate of return=15%

share price=$2.30*(1+5%)/(15%-5%)

share price=$2.415 /10%

share price=$24.15