Question

The UpTowner just paid a $3.45 annual dividend. The company has a policy of increasing the dividend by 4.5 percent annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another four years. If you require a 14.8 percent rate of return, how much will you be willing to pay per share for the 100 shares when you can afford to make this investment?

Answer 1

Answer:

$41.74

Explanation:

For computing the price, first , we need to calculate the current price which is shown below:

= Last dividend × ( 1 + growth rate)  ÷ (Required rate of return - growth rate)

= $3.45 × ( 1 + 0.045) ÷ (14.8% - 4.5%)

= $3.60525 ÷ 10.3%

= $35

Now the price would be

= Current price × ( 1 + growth rate) ^ years

= $35 × ( 1 + 0.045) ^ 4 years

=  $35 × 1.1925

= $41.74