In: Finance
A stock just paid $2.10 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.2 percent. If you require a rate of return of 8.8 percent, how much are you willing to pay today to purchase one share of the company's stock?
In order to find what we are willing to pay today to purchase one share of the company's stock, we will use Constant growth model-
Price of the stock = Dividend to be paid next year/ (Required rate of return - growth rate)
Dividend to be paid next year = Dividend recently paid*(1 + growth rate) = $2.10*1.042 = $2.1882
Price of the stock = $2.1882/ (0.088 - 0.042) = $47.5695