Question

Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 12 percent rate of return, how much are you willing to pay to purchase one share of this stock today?

a) $12.23
b) $12.55
c) $12.67
d) $12.72

Answer 1

To calculate the price of the stock, use the formula for the present value of a growing perpetuity. Based on a required rate of return of 12 percent, the price of the stock is $12.67.

Step-by-step explanation:

To calculate the price of a stock, we can use the formula for the present value of a growing perpetuity. In this case, the dividend is expected to grow by 2.6 percent annually. Based on a required rate of return of 12 percent, the price of the stock can be calculated as follows:

Price = Dividend / (Rate of Return - Growth Rate)

Price = $1.15 / (0.12 - 0.026) = $12.67

Therefore, an investor would be willing to pay $12.67 to purchase one share of this stock today.