Question

MJ Enterprises stock traditionally provides an average rate of return of 11.6 percent. The firm’s next annual dividend is projected at $2.40 with future increases of 3 percent per year. What price should you pay for this stock is you are satisfied with the firm’s average rate of return?

Answer 1

Firm's stock price shall be $27.91

Step-by-step explanation:

Using dividend growth model we have,

`P{_0} = \frac{D{_1}}{K{_e} - g}`

Where P
`{_0}` = Current Price of stock

D
`{_1}` = Dividend to be paid at year end = $2.40

K
`{_e}` = Expected return = 11.6%

g = Expected growth = 3%

Thus P
`{_0}` =
`(2.40)/(11.6 - 3)` = $27.91

Firm's stock price shall be $27.91