Question

How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 2.5 percent annually, and you require a 10 percent rate of return

Answer 1

$9.57 per stock

Step-by-step explanation:

using the dividend discount model to find the stock's current price (P₀):

P₀ = Div₁ / (Re - g)

• Div₁ = $0.70 x 1.025 = $0.7175
• Re = 10%
• g = 2.5%

P₀ = $0.7175/ (10% - 2.5%) = $0.7175/ 7.5% = $9.5667 ≈ $9.57 per stock