How much are you willing to pay for one share of LBM stock if the company just paid a $1.23 annual dividend, the dividends increase by 3.1 percent annually, and you require a return of 16 percent?

Question

Business

Rohan Johnston

19 October, 19:01

How much are you willing to pay for one share of LBM stock if the company just paid a $1.23 annual dividend, the dividends increase by 3.1 percent annually, and you require a return of 16 percent?

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Answers (1)

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Karla Cortez · Answer 1

The maximum that should be paid for this stock today is $9.83

Explanation:

The price of a stock whose dividends are expected to grow at a constant rate forever can be calculated using the constant growth model of DDM. The model bases the price of a stock on the present value of the expected future dividends. The formula for price today under this model is,

Price = D1 / r - g

Where,

D1 is the dividends expected for the next period or D0 * (1+g) r is the required rate of return g is the growth rate in dividends

Price = 1.23 * (1+0.031) / (0.16 - 0.031)

Price = $9.83