Question

lauren corporation will pay a dividend of $3.30 next year. the company has stated that it will maintain a constant growth rate of 5.25 percent a year forever. if you want a return of 18 percent, how much will you pay for the stock?

Answer 1

Using the Gordon Growth Model, the value of a share of stock in Lauren Corporation is approximately $25.88.

Step-by-step explanation:

To calculate the value of the stock, we will use the Gordon Growth Model, also known as the dividend discount model. According to the formula:

Stock Value = Dividend / (Required Return - Growth Rate)

In this case, the dividend is $3.30 (the expected dividend next year) and the growth rate is 5.25%. The required return is 18%, which represents the return you want. Plugging in the values:

1. Stock Value = $3.30 / (0.18 - 0.0525)
2. Stock Value = $3.30 / 0.1275
3. Stock Value ≈ $25.88

Therefore, you would pay approximately $25.88 for a share of stock in Lauren Corporation.

Answer 2

To calculate the price an investor is willing to pay for Lauren Corporation stock, given a desired return of 18%, a dividend of $3.30, and a constant growth rate, use the Gordon Growth Model. The calculated stock price would be approximately $25.88.

Step-by-step explanation:

The value of the Lauren Corporation stock, given an expected constant dividend growth rate and desired return rate, can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model).

In this case, we would use the formula:
P = D1 / (r - g)
Where:
P = the present value of the stock
D1 = the dividend next year
r = the required rate of return
g = the growth rate of the dividends

By substituting the given values:
P = $3.30 / (0.18 - 0.0525)
P = $3.30 / 0.1275

When we do the math, we find:
P = $25.88

Therefore, if an investor wants an 18% return on their investment, they would be willing to pay approximately $25.88 for a stock in Lauren Corporation that will pay a $3.30 dividend next year and grow at a rate of 5.25% forever.