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denpristay [2]
3 years ago
8

You believe that the Non-Stick Gum Factory will pay a dividend of $2 on its common stock next year. Thereafter, you expect divid

ends to grow at a rate of 4% a year in perpetuity. If you require a return of 16% on your investment, how much should you be prepared to pay for the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Business
1 answer:
yuradex [85]3 years ago
8 0

Answer:

$16.67

Explanation:

Data provided in the question;

Dividend to be paid next year, D1 = $2

Expected growth rate of dividend, g = 4% = 0.04

Required rate of return on the investment = 16% = 0.16

Now,

Price to be paid for the stock = \frac{D1}{\textup{(r-g)}}

or

Price to be paid for the stock = \frac{\$2}{\textup{(0.16-0.04)}}

or

Price to be paid for the stock = $16.67

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