Question

Cape Corp. Will pay a dividend of $4.40 next year. The company has stated that it will maintain a constant growth rate of 5 percent a year forever. a. If you want a return of 17 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.G., 32.16.) b. If you want a return of 10 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.G., 32.16.)

Answer 1

Explanation:

a. If you want a return of 17 percent, how much will you pay for the stock?

The price of the stock can be calculated as:

= dividend next year/(required return - growth rate)

= 4.4/(17% - 5%)

= 4.4/12%

= 4.4/0.12

= 36.67

b. If you want a return of 10 percent, how much will you pay for the stock?

At 10%

= 4.4/(10% - 5%)

= 4.4/5%

= 4.4/0.05

= 88