Joe's Diner just paid an annual dividend of $3.10 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 12 percent at the time of your purchase?

Question

Adeline Watts

Business

15 February, 16:58

Joe's Diner just paid an annual dividend of $3.10 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 12 percent at the time of your purchase?

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Answers (1)

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Mitchell Fuller · Answer 1

Joe's Diner will to pay $40.3

Explanation:

Using the dividend discount model we can get the price after one year that Joe willing to pay for the corporation share.

As we know

share price = Do + (1 + g) / (ke - g)

Do = $3.10

g = 4%

ke = 12%

Using the above formula we can get the price of share that Joe's Diner willing to pay for the purchase of stock after one year.

Share price = $3.10 (1+4%) / (12% - 4%)

Share price = $3.224 / 8%

Share price = $ 40.3