Question

Initech, Corp. is going to pay an annual dividend of $3.15 per share on its common stock next year. This year, the company paid a dividend of $3.02 per share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth thirty years from now if the applicable discount rate is 14 percent?

Answer 1

To calculate the price per share of Initech, Corp. common stock thirty years from now, we can use the constant growth dividend model. Given the dividend next year, the growth rate, and the discount rate, we can calculate the price per share.

Step-by-step explanation:

To calculate the price per share of Initech, Corp. common stock thirty years from now, we can use the constant growth dividend model. The formula for the price per share is:

Price per Share = Dividend per Share / (Discount Rate - Dividend Growth Rate)

Given that the dividend next year will be $3.15 per share and the growth rate is constant, we need to find the dividend growth rate. We can use the formula:

Dividend Growth Rate = (Dividend Next Year - Dividend This Year) / Dividend This Year

Substituting the values into the formula, we get:

Dividend Growth Rate = ($3.15 - $3.02) / $3.02 = 0.043

Now we can calculate the price per share:

Price per Share = $3.15 / (0.14 - 0.043) = $30.94

Therefore, one share of Initech, Corp. common stock will be worth $30.94 thirty years from now if the discount rate is 14 percent.