Question

hardware, inc. recently announced their annual dividend will be increasing to $3.15 a share for next year with annual increases in the dividend amount of 1.15 percent thereafter. you require a 13.5 percent rate of return on this relatively risky security. how much are you willing to pay for one share of this stock? $25.51 $25.80 $25.93 $26.04

Answer 1

To calculate the value of a stock using the dividend discount model, you need to use the formula Stock Price = Dividend / (Required Rate of Return - Dividend Growth Rate). In this case, the stock price is $26.04.

Step-by-step explanation:

To calculate how much you are willing to pay for one share of this stock, you need to use the dividend discount model (DDM). The DDM calculates the present value of all the future dividends that will be received from the stock. In this case, the annual dividend for next year is $3.15 and it will increase by 1.15% annually. The required rate of return is 13.5%. Assuming the dividend growth rate stays constant, you can use the formula:

Stock Price = Dividend / (Required Rate of Return - Dividend Growth Rate)

Plugging in the values:

Stock Price = $3.15 / (0.135 - 0.0115) = $26.04

Therefore, you are willing to pay $26.04 for one share of this stock.