Clever Industries Common Stock Price

Determining the Appropriate Current Price for Clever Industries Common Stock

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Question

A financial analyst with Smith, Kleen, and Beetchnutty is examining shares of Clever Industries, for possible investment. Clever Industries is involved in textile manufacturing, and the firm has been growing at a steady rate for much of the last nine decades. The analyst is trying to determine the appropriate current price range for Clever shares, and has ascertained the following information:

Expected annual dividend = $0.35

Expected sustainable annual growth rate = 15%

Investors required rate of return = 18.6%

Given this information, what is the appropriate current price for Clever Industries common stock?

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E

To calculate the appropriate stock price for Clever using the given information, the appropriate equation is as follows: {expected annual dividend/[investor's required rate of return - expected growth rate]}. Incorporating the given information into this equation yields a stock price of $9.722. Remember that this model to stock valuations is most appropriate for firms who are in the constant growth stage. Another important note to remember is that this model will yield realistic results only in those instances in which the investor's required rate of return exceeds the expected growth rate.

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