Question

Three Corners Markets paid an annual dividend of $1.8 a share last month. Today, the company announced that future dividends will be increasing by 2.8 percent annually. If you require a return of 12.0 percent, how much are you willing to pay to purchase one share of this stock today

Answer 1

$20.11

Step-by-step explanation:

The computation of the price i.e. paid is shown below:

Given that

Growth rate = 2.8%

Dividend at time 0 = $1.8

So,

Dividend at time 1 = Dividend at time 0 × (1 + growth rate)

= $1.8 × (1 + 2.8%)

= $!.85

And,

Required return = 12%

Based on the above information

Now use the Gordon Growth formula,

Price today = Dividend at time 1 (Required return - Growth rate)

= $1.85 ÷ (12% - 2.8%)

= $20.11