Question

Upper Crust Bakers just paid an annual dividend of $3.10 a share and is expected to increase that amount by 4 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 12 percent at the time of your purchase?

Answer 1

Answer:

$41.912

Explanation:

Data provided in the question;

Annual dividend paid = $3.10

expected growth rate, g = 4% = 0.04

Number of shares planning to buy = 1,000

Market Rate of return = 12% = 0.12

Now,

the current price of the share = $\frac{\textup{D1}}{\textup{r-g}}$

or

the current price of the share = $\frac{\textup{3.10}\times(1+0.04)}{\textup{0.12-0.04}}$

or

the current price of the share = $40.3

Therefore,

Price per share next year = current price of the share × (1 + g)

= $40.3 × (1 + 0.04)

= $41.912