Question

If your stock pays a dividend D0 = $2.86 at t = 0.and will experience a constant growth of 5.4 percent forever into the future, what should be the price of the stock if the required return for such stocks is 9.1 percent? Answer to the nearest cent, xxx.xx and enter without the dollar sign.

Answer 1

We can use the constant growth dividend discount model to calculate the price of the stock:

P = D1 / (r - g)

Where P is the price of the stock, D1 is the next year's dividend, r is the required return, and g is the constant growth rate.

Since the dividend is growing at a constant rate of 5.4 percent, we can find D1 by multiplying D0 by (1 + g):

D1 = D0 * (1 + g) = 2.86 * (1 + 0.054) = $3.01

Plugging in the values, we get:

P = 3.01 / (0.091 - 0.054) = $84.13

Therefore, the price of the stock should be $84.13.