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21 December, 15:54

Metroplex Corporation will pay a $5.20 per share dividend next year. The company pledges to increase its dividend by 7.20 percent per year indefinitely. If you require a 14.00 percent return on your investment, how much will you pay for the company's stock today

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  1. 21 December, 16:07
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    The maximum amount that an onvestor would be willing to pay for the stock today is $76.47

    Explanation:

    The constant growth model of the dividend growth adn DDM aproach will be used to calcualte the value of the stock as its dividends will grow by a constant percentage forever.

    The price of the stock today based on this model will be,

    P0 = D1 / r - g

    Where,

    D1 is the dividend expected for next year

    r is the required rate of return

    g is the growth rate in dividends

    P0 = 5.2 / (0.14 - 0.072)

    P0 = $76.47
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