Question

Hightower pharmacy just paid a $3.10 annual dividend. the company has a policy of increasing the dividend by 3.8 percent annually. you would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another four years. if you require a 16 percent rate of return, how much will you be willing to pay per share for the 100 shares when you can afford to make this investment?"

Answer 1

To calculate how much you would be willing to pay per share for the 100 shares of stock in Hightower Pharmacy, you can use the present value formula. The present value of the future dividends can be calculated using the required rate of return. Plugging in the values, you would be willing to pay approximately $2.11 per share for the 100 shares when you can afford to make this investment in four years.

Step-by-step explanation:

To calculate how much you would be willing to pay per share for the 100 shares of stock in Hightower Pharmacy, we can use the present value formula. The annual dividend is $3.10, and it increases by 3.8% annually. Since you will be investing in four years, we need to calculate the present value of the future dividends.

First, we calculate the future dividends using the formula:

Future Dividends = Annual Dividend * (1+growth rate)^n

Where the growth rate is 3.8% and n is the number of years (4). Plugging in the values, we find:
Future Dividends = $3.10 * (1+0.038)^4 = $3.10 * 1.164 = $3.61

Next, we calculate the present value of the future dividends using the required rate of return of 16%:

Present Value = Future Dividends / (1+rate of return)^n

Plugging in the values, we find:
Present Value = $3.61 / (1+0.16)^4 = $3.61 / 1.710 = $2.11

So, you would be willing to pay approximately $2.11 per share for the 100 shares when you can afford to make this investment in four years.