Question

Lauren Corp. will pay a dividend of $3.10 next year. The company has stated that it will maintain a constant growth rate of 4.2 percent a year forever. If you want a return of 12 percent, how much will you pay for the stock?

Answer 1

To calculate the price of Lauren Corp.'s stock with a $3.10 dividend, a 4.2% dividend growth rate, and a 12% required rate of return, we use the Gordon Growth Model. The stock price comes out to be $39.74.

Step-by-step explanation:

To find out how much you will pay for the stock based on the given dividend payment and growth rate, we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula given by this model is P = D / (r - g), where P represents the price of the stock, D represents the dividend payment, r represents the required rate of return, and g represents the growth rate of the dividends.

For Lauren Corp. with a dividend (D) of $3.10 next year, a growth rate (g) of 4.2% (or 0.042 as a decimal), and a required rate of return (r) of 12% (or 0.12 as a decimal), we can calculate the price as:

P = 3.10 / (0.12 - 0.042)

P = 3.10 / 0.078

P = $39.74

Therefore, you would be willing to pay $39.74 for a share of Lauren Corp. stock if you require a 12 percent return.