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Snezhnost [94]
3 years ago
9

Wilbert's Clothing Stores just paid a $1.20 annual dividend and increases its dividend by 2.5 percent annually. You would like t

o purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another three years. If you desire a 10 percent rate of return, how much should you expect to pay for 100 shares when you can afford to buy this stock
Business
2 answers:
Ksju [112]3 years ago
7 0

Answer: $1766

Explanation:

Given the following ;

Present dividend (d) = $1. 20

Annual growth of dividend = 2.5%=0.025

Number of shares = 100

Intended period of purchase = 4

If present dividend(P0) = $1.20

After Year 1:

P1 = $1.20 + (0.025 × $1.20) = $1.23

After Year 2:

P2 = $1.23 + (0.025 x $1.23) = $1.26075

After Year 3:

P3 = $1.26075 + (0.025 × $1.26075) = $1.29226875

After Year 4:

P4 = $1.29226875 + (0.025 + $1.29226875) = $1.32457546875

Price of stock = P4 ÷ (0.1 - 0.025)

Price of stock = $1.32457546875 × 0.075 = $17.66

Stock price × number of shares

$17.66 × 100 =$1766

astraxan [27]3 years ago
5 0

Answer:

For 100 shares, the mount that should be paid = $1766

Explanation:

We have to calculate the price of the stock in the 4th year because the investor cannot afford the stock in another 3 years.

Price of the stock = Do + g / ke - g

Dividend in current year = $1.2

Dividend after 1 year = 1.2 +2.5% (1.2)= 1.23

Dividend after 2 years = 1.23 + 2.5%(1.23) = 1.26075

Dividend after 3 years = 1.26075 + 2.5%(1.26) = 1.29227

Price in 4th year = 1.29227 + 2.5% / (0.10 - 0.025)

                            =1.29227 + 2.5%(1.29227)/0.075

                            = 17.66

Therefore, for 100 shares, the mount that should be paid = 17.66 * 100 = $1766

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