Question

Saine Corporation will pay a $3.06 per share dividend next year. The company pledges to increase its dividend by 6 percent per year, indefinitely. If you require a return of 12 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

$51

Explanation:

Given that,

Dividend paid next year, D1 = $3.06 per share

Growth rate of dividend per year, G = 6 percent per year

require a return on investment, Ke = 12 percent

Stock Price = D1 ÷ (Ke - G)

                    = 3.06 ÷ (0.12 - 0.06)

                   = $51

Therefore, I'll pay $51 for the company’s stock today.