Question

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent? Multiple Choice
$12.95
$11.91
$10.54
$12.16
$13.07

Answer 1

Answer:

Option (d) is correct.

Explanation:

P0 = D1 ÷ (ke - g)

Where,

P0 is the price = ?

Currently dividend paid, D0 = $1.62 a share

ke is the required return = 15.70%

g is the growth rate = 2.10%

D1 is the dividend at end of year:

= D0 × (1 + g)

= $1.62 × (1 + 0.021)

= $1.62 × 1.021

= $1.65402

Therefore,

P0 = 1.65402 ÷ (15.7% - 2.1%)

     = 1.65402 ÷ (13.6%)

     = $12.16

Therefore, the price of one share of this stock is $12.16