Question

Ziggs Corporation will pay a $3.90 per share dividend next year. The company pledges to increase its dividend by 5.00 percent per year, indefinitely.

Required:
If you require a 10.75 percent return on your investment, how much will you pay for the company’s stock today? (Select rounded answers as directed, but do not use the rounded numbers in intermediate calculations.)
A. $74.61
B. $23.52
C. $67.83
D. $64.43
E. $24.76

Answer 1

To find the value of Ziggs Corporation's stock with a dividend of $3.90 and a growth rate of 5%, given a required return of 10.75%, the dividend growth model gives us a price of $67.83 per share today.The correct answer is C. $67.83.

Step-by-step explanation:

The value of Ziggs Corporation's stock today, given the dividend growth model, can be calculated using the formula: Price = Dividend per share / (Required rate of return - Growth rate).

Here, the dividend per share next year is $3.90, the growth rate is 5.00 percent (or 0.05 in decimal form), and the required rate of return is 10.75 percent (or 0.1075 in decimal form).

Using these inputs, the calculation becomes:

Price = $3.90 / (0.1075 - 0.05)

Price = $3.90 / 0.0575

Price = $67.83

Therefore, if you require a 10.75 percent return on your investment, you will pay $67.83 for the company's stock today. The correct answer is C. $67.83.