Question

Metroplex Corporation will pay a $5.20 per share dividend next year. The company pledges to increase its dividend by 7.20 percent per year indefinitely. If you require a 14.00 percent return on your investment, how much will you pay for the company's stock today

Answer 1

Answer:

The maximum amount that an onvestor would be willing to pay for the stock today is $76.47

Explanation:

The constant growth model of the dividend growth adn DDM aproach will be used to calcualte the value of the stock as its dividends will grow by a constant percentage forever.

The price of the stock today based on this model will be,

P0 = D1 / r - g

Where,

D1 is the dividend expected for next year

r is the required rate of return

g is the growth rate in  dividends

P0 = 5.2 / (0.14 - 0.072)

P0 = $76.47