Question

What price would you expect to pay for a stock with

13%required rate of return, 4% rate of dividend growth, and an
annualdividend of $2.50 which will be paid tomorrow?

Answer 1

31.39 dollars.

Explanation:

The market value of share can be determine using following formula.

MV =Dividend (1+g)/(KE-g)

where g= growth rate

KE = require rate of return

MV = 2.5 (1.04)/(0.13-0.04) = 28.89

As dividend payment is to be made tomorrow so it will also be included in current market price.

Market price = 28.89 + 2.5 = 31.39 dollars