Question

Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually. What is the current value of this stock to you if you require a 12 percent rate of return?

Answer 1

Answer:

The current value of the  stock  is $12.63

Explanation:

price of a share

$P_{t} = \frac{D_{t} }{R - g}$  ... 1  

                                     where, $P_{t}$ = price of a stock at t years

                                      $D_{t}$ = dividend at year t

                                       R= rate of return from market

                                       g = growth rate of dividend

substituting into equation 1

$P_{t}$ = $1.2 ÷ 12% - 2.5%

    = $1.2 ÷ 0.095

    = $12.6316

     = $12.63