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4 June, 08:36

Business Calculators Inc. will pay an annual dividend of $2.25 per share next year. The company just announced that future dividends will be increasing by 0.75 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 12.25 percent?

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  1. 4 June, 10:42
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    Answer: $19.57

    Explanation:

    You should be willing to pay for the what the stock is valued at the moment and you can use the Gordon Growth Model to value this stock.

    Formula is,

    Vs = D1 / Re - g

    Vs = Value of stock

    D1 = the next dividend

    Re = Required Return

    g = growth rate

    Value of stock is,

    = 2.25 / (12.25% - 0.75%)

    = $19.565

    = $19.57
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