Question

Healthy Foods just paid its annual dividend of $2.90 a share yesterday. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you today if you require a 14 percent rate of return?

Answer 1

Answer:

$26.617

Explanation:

Stock price = D1 ÷ (r - g)

where,

D1 = next expected dividend  

r = required return  = 14 percent

g = growth rate  = 2.8 percent

Therefore, the stock price will be as follows:

= [$2.90 × (1 + 2.8%)] ÷ (14% - 2.8%)

= 2.9812 ÷ 11.2%

= $26.617

Therefore, one share of this stock worth $26.617 today if I require a 14 percent rate of return.