Downtown Brothers paid an annual dividend of $1.15 per share this year. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 12 percent rate of return, how much are you willing to pay to purchase one share of this stock today? Group of answer choices $12.55 $13.70 $9.83 $9.58 $12.23
Question
Downtown Brothers paid an annual dividend of $1.15 per share this year. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 12 percent rate of return, how much are you willing to pay to purchase one share of this stock today?
Group of answer choices
$12.55
$13.70
$9.83
$9.58
$12.23
Solution
To calculate the price you are willing to pay for a share of this stock today, you can use the Gordon Growth Model (also known as the Dividend Discount Model). This model is used to determine the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate.
The formula for the Gordon Growth Model is:
P = D1 / (r - g)
where: P = price of the stock D1 = expected dividend in the next year r = required rate of return g = growth rate of dividends
Given in the problem, we have: D0 (current dividend) = $1.15 g (growth rate) = 2.6% or 0.026 (in decimal form) r (required rate of return) = 12% or 0.12 (in decimal form)
First, we need to calculate D1, the expected dividend in the next year. This is done by multiplying the current dividend by the growth rate plus one:
D1 = D0 * (1 + g) D1 = 1.18 (approximately)
Now we can substitute D1, r, and g into the Gordon Growth Model formula to find the price of the stock:
P = D1 / (r - g) P = 12.23
So, you would be willing to pay approximately 12.23.
Similar Questions
Michael's, Incorporated, just paid $2.45 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.3 percent. If you require a rate of return of 9.5 percent, how much are you willing to pay today to purchase one share of the company's stock?
Richard, Inc., will pay a quarterly dividend per share of $1.15 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.7 percent forever. The appropriate rate of return on the stock is 12 percent, compounded quarterly. What is the current stock price?
This year, Hope Corporation just paid a dividend of $0.50 per share. The company expect dividends to increase dividends at an annual rate of 3.5% forever. If investors require a return of 12%, what is the value of a Hope Corporation share today? Group of answer choices $6.09 $5.88 $4.17 $0.50 $6.59
The Jackson-Timberlake Wardrobe Co. just paid a dividend of $7.92 per share on its stock. The dividends are expected to grow at a constant rate of 4.71 percent per year indefinitely. Investors require a return of 13.6 percent on the company's stock.What is the current stock price?
Networks Ltd is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 18% during the next two years, 15% in the third, and then at a constant rate of 6 per cent thereafter. Networks’ last dividend, which has just been paid, was $0.115. If the required return on the shares is 12%, what is the price of the share today?
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.