Calculating Stock Prices and Weighted Average Cost of Capital (WACC)
Stock Valuation and WACC Examples
Problem 1: Constant Dividend Growth
Thomas Brothers is expected to pay a $0.35 per share dividend at the end of the year (D1 = $0.35). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return is 13%. What is the stock’s current price?
P0 = D1 / (r – g) = 0.35 / (0.13 - 0.06) = $5.00
Problem 2: Current Stock Price with Constant Growth
A stock just paid a dividend of D0 = $1.50. The required rate of return is r = 10%, and the constant growth rate is g = 4.0%. What is the current stock price?
P0 = D0(1+g) / (r – g) = 1.50(1 + 0.04) / (0.10 - 0.04) = $26.00
Problem 3: Expected Stock Price in One Year
Using your answer for problem 2, what is the expected stock price in one year...