Final answer:
An investor should be willing to pay $52.31 for Torbay Corporation's stock today, calculated using the Gordon Growth Model, based on the expected dividend of $3.40 next year, a 4.5% growth rate, and an 11% required rate of return.
Step-by-step explanation:
The question pertains to the valuation of a company's stock based on its future dividend payments and the required rate of return on investment. Torbay Corporation is expected to pay a $3.40 per share dividend next year, with an annual increase of 4.5% indefinitely. To find out how much an investor should pay for the stock today, we can use the Gordon Growth Model (also known as the Dividend Discount Model), which calculates the present value of an infinite series of future dividends that are expected to grow at a constant rate:
P = D1 / (k - g)
Where P is the price of the stock, D1 is the dividend next year, k is the required rate of return, and g is the growth rate of the dividend.
By substituting the given values (D1 = $3.40, k = 0.11, and g = 0.045), we can determine the stock's current value to an investor:
P = $3.40 / (0.11 - 0.045) = $3.40 / 0.065 = $52.31
Therefore, an investor should be willing to pay $52.31 for Torbay Corporation's stock today if they require an 11% return on their investment.