Question

You are considering buying common stock in Grow On, Inc. You have projected that the next dividend the company will pay will equal $3.10 and that dividends will grow at a rate of 10.0% per year thereafter. If you would want an annual return of 13.0% to invest in this stock, what is the most you should pay for the stock now?

a. $23.85
b. $113.67
c. $103.33
d. $26.23
e. $112.90

Answer 1

c. $103.33

Step-by-step explanation:

Stock price = D1/(k-g). Where D1 ​​​​​​=next period dividend, k=expected rate of return, g = growth rate

Stock price = $3.10/(13% - 10%)

Stock price = $3.10/(0.13 - 0.10)

Stock price = $3.10/0.03

Stock price = 103.3333333333333

Stock price = $103.33

So therefore, the most i should pay for the stock now is $103.33