Wilbert's Clothing Stores just paid a $1.20 annual dividend and increases its dividend by 2.5 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 three years. If you desire a 10 percent rate of return, how much should you expect to pay for 100 shares when you can afford to buy this stock

Answer: $1766

Explanation:

Given the following;

Present dividend (d) = $1. 20

Annual growth of dividend = 2.5%=0.025

Number of shares = 100

Intended period of purchase = 4

If present dividend (P0) = $1.20

After Year 1:

P1 = $1.20 + (0.025 * $1.20) = $1.23

After Year 2:

P2 = $1.23 + (0.025 x $1.23) = $1.26075

After Year 3:

P3 = $1.26075 + (0.025 * $1.26075) = $1.29226875

After Year 4:

P4 = $1.29226875 + (0.025 + $1.29226875) = $1.32457546875

Price of stock = P4 : (0.1 - 0.025)

Price of stock = $1.32457546875 * 0.075 = $17.66

Stock price * number of shares

$17.66 * 100 = $1766

For 100 shares, the mount that should be paid = $1766

Explanation:

We have to calculate the price of the stock in the 4th year because the investor cannot afford the stock in another 3 years.

Price of the stock = Do + g / ke - g

Dividend in current year = $1.2

Dividend after 1 year = 1.2 + 2.5% (1.2) = 1.23

Dividend after 2 years = 1.23 + 2.5% (1.23) = 1.26075

Dividend after 3 years = 1.26075 + 2.5% (1.26) = 1.29227

Price in 4th year = 1.29227 + 2.5% / (0.10 - 0.025)

=1.29227 + 2.5% (1.29227) / 0.075

= 17.66

Therefore, for 100 shares, the mount that should be paid = 17.66 * 100 = $1766