Question

Miller Brothers Hardware paid an annual dividend of $0.95 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one share of this stock today

Answer 1

Answer:

9.37

Explanation:

Miller Brothers Hardware

Annual dividend per share × Increased in Dividend/Required Rate Increase

0.95×1.026/0.13-0.026

=0.9747/0.104

=9.37

Therefore 9.37 will be paid in order to purchase one share of the stock.

Answer 2

Answer:

The amount to be paid to purchase a share of the stock today is $9.37

Explanation:

In this question , we are asked to calculate the amount which is to be paid to purchase a share of a particular stock by a company.

We employ a mathematical approach to this:

Mathematically, the amount to pay to purchase a share of the stock today is = D * [(1+g)/(r-g)]

Where D is annual dividend = $0.95

g = percentage of future dividend increase = 2.6% = 0.026

r = rate of return = 13% = 0.13

We input these values in the formula above:

Amount = 0.95 * [(1+0.026)/(0.13-0.026)] = 0.95 * 9.8654 = $9.37