Question

A firm is planning on increasing its annual dividend by 3.50% a year in perpetuity. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 15.50%?a) $2.04b) $1.67c) $1.73d) $1.34

Answer 1

Answer:

c.) $1.73

Explanation:

Price = $\frac{D0(1+g)}{(r-g)}$

D0= Last dividend paid

r= rate of return

g = growth rate

Price = $\frac{0.20(1.035)}{(0.1550-0.035)}$

Price = 0.207 / 0.12

Price = 1.725

Therefore, the current value of the stock is $1.73