Question

Poulter Corporation will pay a dividend of $4.60 per share next year. The company pledges to increase its dividend by 6.75 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

You will pay $108.24 for the company’s stock today.

Explanation:;

The price to pay for the company’s stock today can be calculated using the Gordon Growth Model (GGM) formula which assumes that dividend growth rate of a company will continue to be constant indefinitely. The GGM formula is as given below:

P = d/(r – g) ……………………………………… (1)

Where;

P = Price to pay for the company’s stock today = ?

d = Next year dividend per share = $4.60

r = required return = 11%, or 0.11

g = Constant dividend growth rate = 6.75%, or 0.0675

Substituting the values into equation (1), we have:

P = $4.60 / (0.11 - 0.0675)

P = $4.60 / 0.0425

P = $108.24

Therefore, you will pay $108.24 for the company’s stock today.