Question

Item9 Item 9Item 9 Yummy Bakery just paid an annual dividend of $3.40 a share and is expected to increase that amount by 2.2 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 14.8 percent at the time of your purchase

Answer 1

Answer:

pay amount = $28.18

Explanation:

given data

annual dividend Do = $3.40

growth rate g = 2.2 % per year = 0.022

stock buy  = 1,000 shares

market rate of return = 14.8 percent

solution

first we get here dividend at year 1 that is express as

D1 = Do × (1+g)     .................1

D1 = 3.40 × (1 + 0.022)

D1 = 3.4748

and

now we get here dividend at year 2  

D2 = D1 × (1+g)      .................2

D2 = 3.4748 × (1.022)

D2 = 3.5512

so here

we get next year price that is

Price  P1 = D2 ÷ (r-g)    ........................3

put here value and we get

P1 = $\frac{3.5512}{(0.148 - 0.022)}$  

P1 = 28.1841

so we will pay amount = $28.18