Vincent's Hotel currently pays a $2.20 common stock dividend. Dividends have been recently growing at a 3% annual rate and are expected to continue growing at this rate for the next 2 years. Thereafter, the growth rate is expected to be 0% for the foreseeable future. What is the current value of Vincent's Hotel common stock to an investor requiring 17% rate of return?

Question

Zain Cruz

Mathematics

16 June, 09:58

Vincent's Hotel currently pays a $2.20 common stock dividend. Dividends have been recently growing at a 3% annual rate and are expected to continue growing at this rate for the next 2 years. Thereafter, the growth rate is expected to be 0% for the foreseeable future. What is the current value of Vincent's Hotel common stock to an investor requiring 17% rate of return?

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Answers (1)

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Dante White · Answer 1

The current value of Vincent's Hotel common stock is US$ 12.95, that fulfills the requirement of an investor of 17% of rate of return annually.

Step-by-step explanation:

1. Let's review the information given for answering correctly the question:

Currently common stock dividend = US$ 2.20

Annual growth of the dividend for the next 2 years = 3%

Annual growth of the dividend after the next 2 years = 0%

2. What is the current value of Vincent's Hotel common stock to an investor requiring 17% rate of return?

17% = 0.17

Current value of Vincent's Hotel common stock = 2.20/0.17

Current value of Vincent's Hotel common stock = US$ 12.95