How much are you willing to pay for one share of stock if the company just paid an annual dividend of $1.03, the dividends increase by 3 percent annually, and you require a rate of return of 15 percent?

Question

Emmett

Business

5 May, 11:05

How much are you willing to pay for one share of stock if the company just paid an annual dividend of $1.03, the dividends increase by 3 percent annually, and you require a rate of return of 15 percent?

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Answers (1)

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Addison Burch · Answer 1

The fair price of the stock today is $8.84 and that is the maximum that should be paid for the stock today.

Explanation:

The price of the stock today can be calculated using the constant growth model of DDM. The DDM values the stock based on the expected future dividends from the stock. The price per share can be calculated as,

P0 = D0 * (1+g) / (r - g)

Where,

D0 * (1+g) is the dividend next year or D1 r is the required rate of return g is the growth rate in dividends

P0 = 1.03 * (1+0.03) / (0.15 - 0.03)

P0 = $8.84