Question

Hudson Corporation will pay a dividend of $5.00 per share next year. The company pledges to increase its dividend by 7.80 percent per year indefinitely.

If you require a return of 5.40 percent on your investment, how much will you pay for the company's stock today?
a. $150.86
b. $157.14
c. $163.43
d. $152.12
e. $36.72

Answer 1

$157.14

Step-by-step explanation:

Calculation for how much will you pay for the company's stock today

Using this formula

P0 = D1 / (Ke - g)

Where,

P0 = Price of Share

D1 = Current Dividend=$3.30

Ke = Cost of Equity=5.40%

g = growth rate=3.30%

Let plug in the formula

P0 = $3.30/ (5.40%-3.30%)

P0 = $3.30/0.021

P0= $157.14

Therefore the amount that you will pay for the company's stock today will be $157.14