Question

g HR Services just paid its annual dividend of $1.25 per share. The firm recently announced that all future dividends will be increased by 3 percent annually. What is one share of this stock worth to you if you require a rate of return of 11.5 percent

Answer 1

$15.15

Step-by-step explanation:

For the computation of stock price first, we need to find out the dividend after 1 year is shown below:-

Dividend after 1 year = Dividend paid × (1 + Increase annual Percentage)^1

= $1.25 × 1.03

= 1.2875

Stock price = Dividend after 1 year ÷ (Rate of return - Increase annual Percentage)

= 1.2875 ÷ (0.115 - 0.03)

= 1.2875 ÷ 0.085

= $15.15

So, for computing the stock price we simply applied the above formula.