What should you pay for a stock if next year's annual dividend is forecast to be $5.25, the constant-growth rate is 2.85%, and you require a 15.5% rate of return?

Stock price = $41.50

Explanation:

We know,

Stock price, Po = Dividend of next year (D1) : (Required rate of return (k) - divindend growth rate, g)

Given,

Dividend for the next year, D1 = $5.25

Required rate of return, k = 15.5% = 0.155

Constant growth rate, g = 2.85% = 0.0285

Putting the values into the right formula, we get,

Po = D1 : (k - g)

or, Po = $5.25 : (0.155 - 0.0285)

or, Po = $5.25 : 0.1265

Therefore, Po = $41.50

Therefore, the company's share price is stable and acceptable.