Question

Hudson Corporation will pay a dividend of $2.80 per share next year. The company pledges to increase its dividend by 4.90 percent per year indefinitely.

If you require a return of 9.40 percent on your investment, how much will you pay for the company's stock today?

Multiple Choice

• $59.73

• $64.71

• $18.67

• $59.32

• $62.22

Answer 1

Information provided:

Next dividend payment= $2.80

Dividend growth rate= 4.90%

Required return= 9.40%

The question can be solved using dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of the stock today= $2.80/ 0.0940 – 0.0490

                                             = $2.80/ 0.0450

                                             = $62.22

Hence, the answer is option e.

In case of any query, kindly comment on the solution.