Question

Company X just paid $1.95 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.3 percent. If you require a rate of return of 8.5 percent, how much are you willing to pay today to purchase one share of the company's stock

Answer 1

The fair price of stock today is $48.425 and that is the most one should be willing to pay today.

Step-by-step explanation:

The company's dividend will grow at a constant rate of 4.3% which means that the constant growth model of Dividend Discount Model will be used to calculate the price of a stock today.

The formula for Constant growth model is,

P0 = D0 (1 + g) / r - g

Where,

• D0 is dividend today
• r is the required rate of return
• g is the growth rate in dividend

P0 = 1.95 * (1+0.043) / 0.085 - 0.043

P0 = $48.425