Question

Hudson Corporation will pay a dividend of $2.78 per share next year. The company pledges to increase its dividend by 4.5 percent per year indefinitely. If you require a return of 15 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

You need to pay $26.47. The further explanation is given below.

Explanation:

The given values are:

Dividend

$D_1 = 2.78\ per share$

Required rate of return

$k_e = 0.15$

Dividend's growth rate

$g = 0.045$

Now,

The stock price will be:

= $\frac{2.78}{0.15-0.045}$

= $\frac{2.78}{0.105}$

= $26.47$