Question

the brown company just announced that it will be increasing its annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. how much would you be willing to pay for one share of the brown company stock if you require a 12% rate of return? multiple choice $14.35 $14.63 $17.68 $18.13 $19.81

Answer 1

To determine the price of a share of The Brown Company stock, you can use the dividend discount model to calculate the present value of its future dividends. Plugging in the given values, the price per share is $14.63.

Step-by-step explanation:

To determine the price you would be willing to pay for a share of The Brown Company stock, you need to calculate the present value of its future dividends. The dividend in the next year is $1.68, and it will increase by 2.5% annually. Considering your required rate of return is 12%, you can calculate the present value of the dividend stream using the dividend discount model.

The formula to calculate the present value of the dividend stream is:

Price per Share = Dividend / (Rate of Return - Dividend Growth Rate)

Plugging in the values, we have:

Price per Share = $1.68 / (0.12 - 0.025) = $14.63

Therefore, you would be willing to pay $14.63 for one share of The Brown Company stock.