You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of $7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you want an annual return of 24.0%, what is the most you should pay for the stock now

The answer is $56.68

Explanation:

Solution

We recall that:

The firm paid a dividend of = $7.80

The projected growth of dividends is at a rate = 9.0%

The annual return = 24.0%

Now,

V = ($7.80 * (1.09) / (.24 - 0.9)

= (8.502) / (.24-0.9)

= (8.502) * (-0.66)

= $56.68

Therefore, this would be the most we would pay for the stock. If we paid less than that, our return would be above the 24%.