Question

Dividends on CCN corporation are expected to grow at a 9% per year. Assume that the discount rate on CCN is 12% and that the expected dividend per share in one year is $0.50. CCN has just paid a dividend, so the next dividend is the $0.50 to be paid one year from now.

Calculate today's price per share for CCN.

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

Answer 1

To calculate today's price per share for CCN, we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula is:

\[
P_0 = \frac{D_1}{r - g}
\]

Where:
- \(P_0\) = Price per share today
- \(D_1\) = Expected dividend in one year
- \(r\) = Discount rate (required rate of return)
- \(g\) = Growth rate of dividends

From the information provided:
- \(D_1 = 0.50\)
- \(r = 0.12\)
- \(g = 0.09\)

Now, substituting the values into the formula:

\[
P_0 = \frac{0.50}{0.12 - 0.09}
\]

Calculating the denominator:

\[
0.12 - 0.09 = 0.03
\]

Now, substituting back into the formula:

\[
P_0 = \frac{0.50}{0.03} = 16.67
\]

Thus, the price per share for CCN today is:

\[
\text{Price per share} = 16.67
\]

So, the answer is:

16.67