Question

Michael's, Inc. just paid $2.75 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.90 percent. If you require a rate of return of 10.1 percent, how much are you willing to pay today to purchase one share of Michael's stock?

Answer 1

Answer:

$69.34

Explanation:

The computation of today one share of stock is shown below:

= (Next year dividend) ÷ (Required rate of return - growth rate)

where,

Next year dividend is

= $2.75 + $2.75 × 5.90%

= $2.75 + 0.16225

= $2.91225

And, the required rate of return is 10.1%

Plus, the growth rate is 5.90%

So, the today price is

= ($2.91225) ÷ (10.1% - 5.90%)

= ($2.91225) ÷ (4.2%)

= $69.34