The current price of ADM's stock, Po, is $20 and the company is expected to pay a $2.20 dividend next year. If the appropriate required rate of return for ADM's stock is 15 percent, what should be the price of the stock in one year, P-hat sub 1? Assume that the company has achieved constant growth.

Question

The current price of ADM's stock, Po, is $20 and the company is expected to pay a $2.20 dividend next year.  If the appropriate required rate of return for ADM's stock is 15 percent, what should be the price of the stock in one year, P-hat sub 1?  Assume that the company has achieved constant growth.

anonymous · Answer

you can use dividend discount model to calculate the stock price, but you would need cost of capital. the formula is price = dividend/(cost of capital - growth rate)