Tetra, Inc., is expected to pay $9.1 to its shareholders as the annual dividend at the...

Tetra, Inc., is expected to pay $9.1 to its shareholders as the annual dividend at the end of this year. Simultaneously, the company announced that future dividends will be increasing by 5.7 percent. If you require a rate of return of 11.0 percent, how much are you willing to pay today to purchase one share of the company's stock?

148.51

171.7

191.88

145.47

143.33

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Expert Solution

Solution :

Calculation of price of one share of a stock today :

The price of one share of a stock today can be calculated using the following formula :

P0 = D1 / ( Ke – g )

Where,

P0 = Price of the stock today ; D1 = Annual Dividend payment at the end of the year ;

Ke = Required rate of Return ; g = growth rate ;

As per the information given in the question we have

D1 = $ 9.1 ; g = 5.7 % = 0.057 ; Ke = 11.0 % = 0.11 ; P0 = To find ;

Applying the above values in the formula we have the price per share of stock as

= $ 9.1 / ( 0.11 – 0.057 )

= $ 9.1 / 0.053

= $ 171.6981

= $ 171.7 ( when rounded off to one decimal place )

Thus the price that can be paid today to purchase one share of the company's stock = $ 171.7

The solution is Option 2 = $ 171.7

jeff jeffy answered 1 year ago

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