Question

The Brown Company just announced that they will be increasing their annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. How much would you be willing to pay for one share of the Brown Company stock if you require a 12% rate of return?

Answer 1

Current price of Brown Company = $17.68

Step-by-step explanation:

Using dividend growth model we have

`P_0 = (D_1)/(K_e\: -\: g)`

Where,
`P_0` = Current price of share

`D_1` = Dividend to be paid at year end = $1.68 as provided,

`K_e` = Cost of equity or expected return on equity = 12% as provided,

g = growth rate = 2.5% as provided,

Now putting the values in above we have

`P_0 = (1.68)/(0.12 - 0.025)`

`P_0 = (1.68)/(0.095)`

`P_0 = 17.68`

Current price of Brown Company = $17.68

This is the price every person would be willing to pay at current level.