Michael's, Inc., just paid $1.95 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.3 percent. If you require a rate of return of 8.5 percent, how much are you willing to pay today to purchase one share of the company's stock

Question

Business

Katherine Brooks

30 May, 20:17

Michael's, Inc., just paid $1.95 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.3 percent. If you require a rate of return of 8.5 percent, how much are you willing to pay today to purchase one share of the company's stock

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Answers (1)

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Julius Richardson · Answer 1

I would be willing to $46.43 for the company's share today.

Explanation:

The price of the share today can be deduced from the below formula:

Price of share = dividend / (rate of return-dividend growth rate)

dividend is $1.95 per share currently

rate of return required by investors investing in the share is 8.5%

the dividend payment is expected to grow by 4.3%

price of share today=$1.95 / (8.5%-4.3%)

=$46.43

The share today should priced at $46.43 as the price of share today is a function of dividends payable by the share in future and by also considering the rate of return expected by investors and dividend growth rate