Question

You believe that the Non-Stick Gum Factory will pay a dividend of $3 on its common stock next year. Thereafter, you expect dividends to grow at a rate of 2% a year in perpetuity. If you require a return of 10% on your investment, how much should you be prepared to pay for the stock

Answer 1

I will pay $37.50 for the stock

Step-by-step explanation:

Dividend growth model is the method of calculating the value of company stock based on the present value of all present value of all of its dividend.

We can calculate the price of stock by using following formula of dividend growth model.

Price = D1 / ( rate of return - growth rate )

Price = $3 / ( 10% - 2% )

Price = $3 / 8%

Price = $3 / 0.08

Price = $37.5