Question

Elegante Homes stock traditionally provides a 16 percent rate of return. The company just paid an annual dividend of $3.20 a share and is expected to increase that amount by 5 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 9 percent at the time of your purchase?

A. $30.55
B. $32.07
C. $67.20
D. $88.20

Answer 1

To calculate the expected price per share of Elegante Homes stock, we need to consider the dividend and the rate of return. The expected price per share is $3.08.

Step-by-step explanation:

To calculate the expected price per share of Elegante Homes stock, we need to consider the dividend and the rate of return. Since the dividend is expected to increase by 5 percent per year, we can calculate the future dividend using the formula: Future Dividend = Current Dividend * (1 + Growth Rate).

So, the future dividend will be $3.20 * (1 + 0.05) = $3.36 per share.

Next, we can calculate the present value of the future dividend using the formula: Present Value = Future Value / (1 + Rate of Return).

So, the present value of the future dividend will be $3.36 / (1 + 0.09) = $3.08.

Therefore, the expected price per share of Elegante Homes stock is $3.08. Answer choice A, $30.55, is the closest to this value.