Question

Michael's, Inc., just paid $2.55 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.5 percent. If you require a rate of return of 9.7 percent, how much are you willing to pay today to purchase one share of the company's stock?

Answer 1

$64.05

Step-by-step explanation:

The computation of the today share is shown below:

= {Current year dividend × ( 1 + growth rate)} ÷ (Required rate of return - growth rate)

= {$2.55 × ( 1 + 5.5%)} ÷ (9.7% - 5.5%)

= ($2.55 × 1.055) ÷ (9.7% - 5.5%)

= 2.69025 ÷ 4.2%

= $64.05

The {Current year dividend × ( 1 + growth rate)} reflect the next year dividend