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12 July, 16:13

Monn Company, a producer of fine liqueurs, has earnings and common stock dividends have been growing at an annual rate of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of $4.00. Assuming that Monn's common stock dividends continue growing at the past rate for the foreseeable future, determine the value of the company's common stock to an investor who requires a 13 percent rate of return on these securities.

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  1. 12 July, 16:33
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    The correct stock price is $46.22

    Explanation:

    Step 1. Given information.

    Annual rate of growth (g) = 0.04

    Annual dividend = 4.00

    rate of return (i) = 0.13

    Step 2. Formulas needed to solve the exercise.

    Next dividend = annual rate of growth * annual dividend Stock price = Next Dividend / (i - g)

    where i is the rate of return and g is the growth rate.

    Step 3. Calculation.

    Next dividend = 4.00 * (1.04) = 4.16 Stock price = 4.16 / (0.13-0.04) = 46.22

    Step 4. Solution.

    So the correct stock price is $46.22
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