You are valuing a common stock that just paid a dividend of $1.25 per share. You are expecting the stock to grow at the rate of 4% annually, and the stock to give you a return of 9%. What should be the price of the stock

Price of stock - $26

Explanation:

Using te dividend valuation model, the price of a stock is the present value of the future cash flows expected from the stock discounted at the required rate of return.

Where a stock is expected to pay dividend growing at a specific rate, the price of the stock can be dertermined as follows:

Price = D (1+g) / (ke-g)

D - dividend payable now,

Ke-required rate of return,

g - growth rate in dividend

So we can work out the price as follows:

Price = 1.25 (1+0.04) / (0.09-0.04)

= $26

Price = $26