Answer :
From the given information, The value of ABC stock when the required return is 15 percent is $59.73
As per dividend discount model,
Value of ABC stock = D0 × (1+g) / (K-g)
= 1.60 × (1+0.12) / (0.15-0.12)
= $ 59.73
Where,
D0 Recent paid dividend $ 1.60
g Growth rate in dividend 12%
K Required return 15%
- The dividend discount model (DDM), a mathematical technique for forecasting stock prices, is based on the idea that, when discounted back to their present value, the price of a company's shares today is equal to the total of all of its future dividend payments. It aims to determine a stock's fair value regardless of the current market conditions and takes into account the dividend distribution considerations and the anticipated market returns. The stock is cheap and should be purchased if the value derived from the DDM is more than the price at which shares are currently trading, and vice versa.
- The minimal return an investor will take for owning a company's shares, in exchange for a specific amount of stock-holding risk, is known as the required rate of return (RRR). To assess the profitability of new investment projects, the RRR is widely employed in corporate finance.
- A corporation pays dividends to its investors in order to distribute earnings to them. They're paid on a regular basis and are one of the ways stock investors can profit from their investments.
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