Question

will pay an annual dividend of $2.25 per share next year. The company just announced that future dividends will be increasing by 0.75 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 12.25 percent?

Answer 1

Answer:

= $19.57

Explanation:

Price of the stock (P0) = Div1 / (r-g)

Div1 = next year's dividend = $2.25

r = required return = 12.25% or 0.1225 as a decimal

g = growth rate = 0.75% or 0.0075 as a decimal

Next, plug in the numbers to the formula;

Price (P0) = 2.25/ (0.1225 -0.0075)

Price (P0) = 2.25 / 0.115

= $19.57