Question

In: Finance

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

Solutions

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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