Question

You are considering purchasing stock. The stock is expected to pay a dividend of ​$94 per share. The consensus of investors is that these dividends will increase at a rate of 4 percent per year for the indefinite​ future, and the interest rate is 12 percent. The price of the stock should be ​$ ________.

Answer 1

PV=1,175

Step-by-step explanation:

this question can be solved thinking as if we have a perpetuity, it is a future infinite payments, but in this particular case we have those payments (dividends) increasing over the time, so we can apply the next formula:

`PV=(94)/(i-k)`

where PV is the present value of the future payments, i is the interest rate and k is the annual increasing, so applying to this data we have:

`PV=(94)/(0.12-0.04)`

`PV=1,175`