Question

Orange Computer just paid a $0.23 dividend. They regularly pay dividends once per quarter. Assume that those dividends will grow at about a 4% (APR) rate. If you demand a 15% annual (APR) return on your investment, what should be the share price today?

Answer 1

The share price today is $2.09.

Step-by-step explanation:

To calculate the share price today, we need to use the dividend discount model (DDM) formula. The DDM formula calculates the present value of expected future dividends. In this case, the dividend is expected to grow at 4% per year, and you demand a 15% annual return.

Here's the formula:

Share Price = Dividend / (Required Return - Dividend Growth Rate)

Plug in the values: Dividend = $0.23, Required Return = 15%, Dividend Growth Rate = 4%:

Share Price = $0.23 / (0.15 - 0.04) = $0.23 / 0.11 = $2.09

Therefore, the share price today should be $2.09.