Question

Fake Company Pi just paid a large dividend to common shareholders of $3.20. Company executives also announced a plan to keep the dividend growing at 2.2% for the foreseeable future. If your required return on equity investments is 7.6%, what is an appropriate price for you to pay for this stock?

Answer 1

Using the Gordon Growth Model, which calculates the present value of an infinite series of future dividends that grow at a constant rate, and given a $3.20 dividend with a growth rate of 2.2% and a required return of 7.6%, the appropriate price for the stock is calculated to be $59.26.

Step-by-step explanation:

The question at hand involves calculating the appropriate price to pay for a stock based on its expected dividend growth rate and your required rate of return. This calculation can be done using the Gordon Growth Model, which is a part of dividend discount models. Given the dividend of $3.20, a growth rate of 2.2%, and a required return of 7.6%, the formula to find the price is:

P = D / (r - g)

Where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. By plugging in the numbers:

P = $3.20 / (0.076 - 0.022) = $3.20 / 0.054 = $59.26

Therefore, an appropriate price to pay for the stock would be $59.26.