Question

Michael's, Inc., just paid $2.00 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.4 percent. If you require a rate of return of 8.6 percent, how much are you willing to pay today to purchase one share of the company's stock?

Answer 1

$49.71

Step-by-step explanation:

The computation of the willing to pay for the company stock is shown below:

= Next year dividend ÷ (Required rate of return - growth rate)

where,

Next year dividend is

= $2 + $2 × 4.4%

= $2 + 0.088

= $2.088

The required rate of return is 8.6% and the growth rate is 4.4%

So, the price of one share of the company stock is

= $2.088 ÷ (8.6% - 4.4%)

= $2.088 ÷ 4.2%

= $49.71

We simply applied the above formula