The Oxford Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. What is the value of the company's stock if the required rate of return is 12 percent?
What will be an ideal response?
Constant growth rate, g = ($4.63 / $4.00) 1 / 3 - 1 = 0.04996, g = 5%
P = D5 / (r - g) = 4.63 (1 + 0.05) / (0.12 - 0.05) = $69.45
Business
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