Question

Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually. What is the current value of this stock to you if you require a 12 percent rate of return?

Answer 1

The current value of the stock is $12.63

Step-by-step explanation:

price of a share

`P_(t) = (D_(t) )/(R - g)` ... 1

where,
`P_(t)` = price of a stock at t years

`D_(t)` = dividend at year t

R= rate of return from market

g = growth rate of dividend

substituting into equation 1

`P_(t)` = $1.2 ÷ 12% - 2.5%

= $1.2 ÷ 0.095

= $12.6316

= $12.63