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?

Question

Business

Oz

19 February, 19:58

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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Answers (1)

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Coby Valencia · Answer 1

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