Question

1) Michael's, Inc., just paid $1.95 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.3 percent. If you require a rate of return of 8.5 percent, how much are you willing to pay today to purchase one share of the company's stock? 2PTS

Answer 1

Price we are wiling to pay = $46.429

Step-by-step explanation:

Hi, this can be calculated using the dividend discount model

Stock price we are willing to pay = D / (r - g) where,

D = Dividend

r = required rate of return of investor

g = growth

So working the formula gives us,

Price = 1.95 / (0.085 - 0.043)

Price = $46.429

This is the price we are willing to pay.

Hope that helps.