What is the constant dividend paid by Gruber Corp. on its stock?

  

Gruber Corp. pays a constant $8.45 dividend on its stock. The company will maintain this dividend for the next 15 years and will then cease paying dividends forever. If the required return on this stock is 13 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current share price$

Introduction:
Understanding the share prices of a company is crucial for investors while making investment decisions. The share prices of a company are influenced by various factors which every individual should consider before investing. In this context, we will discuss the share prices of Gruber Corp. and how the dividend payments impact the current share price of the company.

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Description:
Gruber Corp. is known for paying a constant dividend of $8.45 on its stock. The company has decided to maintain this dividend for the next 15 years and will then cease paying dividends forever. The required return on this stock is calculated to be 13 percent. At this point, the question arises: what is the current share price of Gruber Corp.? This calculation is done to understand the valuation and financial stability of the company, which is very important while making investment decisions. To calculate the current share prices, we need to look at various factors such as market trends, competition, dividends, and other financial indicators. In this case, we only need to calculate the share price based on the current dividend payout and required return. Hence, the current share price of Gruber Corp. is calculated to be $49.46 after applying the required formula. This calculation provides valuable insights into the current market value of Gruber Corp. and gives potential investors an idea of whether or not they should invest in the company.

Objectives:
– To understand the concept of dividend payment on stocks
– To be able to calculate the current share price of a stock using the dividend payment and required return

Learning Outcomes:
By the end of the lesson, the learner will be able to:
– Define the term “dividend” and explain its significance in stock valuation
– Calculate the current share price of a stock using the constant dividend payment and required return
– Analyze the relationship between required return and stock price, and identify factors that influence stock valuation

Header: Understanding dividend payment on stocks

Objective: To understand the concept of dividend payment on stocks

Learning Outcomes:
– Define the term “dividend” and explain its significance in stock valuation

Header: Calculating the current share price of a stock using dividend payment and required return

Objective: To be able to calculate the current share price of a stock using the dividend payment and required return

Learning Outcomes:
– Calculate the current share price of a stock using the constant dividend payment and required return
– Analyze the relationship between required return and stock price, and identify factors that influence stock valuation

Solution 1: Using the Dividend Discount Model

The Dividend Discount Model (DDM) is a popular approach to valuing stocks that pay dividends. It calculates the present value of future cash flows (dividends) expected from the stock using a required rate of return. To calculate the current share price of Gruber Corp., we can use the following formula:

PV = D / r – g

Where:
PV = Present value of the stock
D = Annual dividend payment
r = Required rate of return
g = Dividend growth rate

Given that Gruber Corp. pays a constant $8.45 dividend for the next 15 years, we can assume a dividend growth rate of 0% after that. Therefore, using a required rate of return of 13%, we can calculate the current share price as follows:

PV = $8.45 / 0.13 – 0
PV = $65.00

Therefore, the current share price of Gruber Corp. is $65.00.

Solution 2: Using the Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is another approach to valuing stocks that takes into account both market risk and the risk-free rate of return. It calculates the expected return of the stock based on the risk-free rate, the market risk premium, and the stock’s beta. To calculate the current share price of Gruber Corp., we can use the following formula:

r = r_f + β * (r_m – r_f)

Where:
r = Required rate of return
r_f = Risk-free rate of return
β = Stock’s beta
r_m = Expected market return
r_m – r_f = Market risk premium

Assuming a risk-free rate of 2.5%, a market risk premium of 8%, and a beta of 1.2 for Gruber Corp., we can calculate the required rate of return as follows:

r = 2.5% + 1.2 * 8%
r = 12.9%

Using the same dividend information as in Solution 1, we can apply the Gordon Growth Model to calculate the current share price as follows:

PV = D / (r – g)
PV = $8.45 / (0.129 – 0)
PV = $65.50

Therefore, the current share price of Gruber Corp. is $65.50.

Suggested Resources/Books:
– “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company
– “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
– “Corporate Finance For Dummies” by Michael Taillard

Similar Asked Questions:
1. How is the required return on a stock determined?
2. What factors influence a company’s decision to pay or cease paying dividends?
3. How can an investor determine if a company’s current stock price is undervalued or overvalued?
4. What are some valuation methods used to determine the value of a company’s stock?
5. How can an individual investor effectively manage their stock portfolio for long-term growth?

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