Question

Hudson Corporation will pay a dividend of $2.78 per share next year. The company pledges to increase its dividend by 4.5 percent per year indefinitely. If you require a return of 15 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 need to pay $26.47. The further explanation is given below.

Step-by-step explanation:

The given values are:

Dividend

`D_1 = $2.78\ per share`

Required rate of return

`k_e = 0.15`

Dividend's growth rate

`g = 0.045`

Now,

The stock price will be:

=
`(2.78)/(0.15-0.045)`

=
`(2.78)/(0.105)`

=
`26.47`