How much are you willing to pay for one share of levine stock if the companies just paid $1.5 annual dividend, the dividends increase by 3% annually, and you require a 15% rate of return

Answer: $12.875

Explanation:

Required rate of return (r) = 15%

Growth rate (g) = 3%

Do = $1.5

P = D1 : (r - g)

P = current price of a share of stock

D1 = expected Dividend at year end

g = growth rate

r = investor's required rate of return

D1 = Do * (1 + g)

Therefore,

P = [ (Do * (1 + g)) : (r - g) ]

P = [ ($1.5 * (1 + 0.03)) : (0.15 - 0.03) ]

P = [ ($1.5 * 1.03) : 0.12]

P = [ $1.545 : 0.12]

P = $12.875