You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 4.6 percent indefinitely. The company just paid a dividend of $3.41 and you feel that the required return on the stock is 11 percent. What is the price per share of the company's stock?

price per share of the company's stock is $53.28

Explanation:

Under dividend growth model a stock is overvalued or undervalued assuming that the firm’s expected dividends grow at a value g forever, which is subtracted from the required rate of return or k.

Therefore, the stable dividend growth model formula calculates the fair value of the stock as P =D1 / ( k – g ).

P= price per share

D1 = current dividend

k = required return

g = growth rate

P= $3.41 ÷ (11 %  - 4.6% ) =( 3.41 ÷ 0.064 )=  $53.28

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