Question

How much are you willing to pay for one share of levine stock if the companies just paid $1.5 annual dividend, the dividends increase by 3% annually, and you require a 15% rate of return

Answer 1

Answer: $12.875

Step-by-step explanation:

Required rate of return(r) = 15%

Growth rate(g) = 3%

Do = $1.5

P = D1 ÷ (r - g)

P = current price of a share of stock

D1 = expected Dividend at year end

g = growth rate

r = investor's required rate of return

D1 = Do × (1 +g)

Therefore,

P = [(Do × (1 +g)) ÷ (r - g)]

P = [ ($1.5 × (1 + 0.03)) ÷ (0.15 - 0.03)]

P = [ ($1.5 × 1.03) ÷ 0.12]

P = [ $1.545 ÷ 0.12]

P = $12.875