Question

Solar Energy will pay an annual dividend of $1.93 per share next year. The company just announced that future dividends will be increasing by 1.6 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 11.75 percent?

Answer 1

Answer:

$19.0148

Explanation:

Using the dividend growth model, we know

$P_0 = \frac{D_1}{Ke\ -\ g}$

Where P0 represents the current price of the share.

D1 represents dividend to be paid at year end.

Ke represents the required rate of return

g represents the expected permanent growth rate.

As provided putting all the values in the equation we have:

P0 = $\frac{1.93}{0.1175 - 0.016} = \frac{1.93}{0.1015} = 19.0148$

Therefore, the price to be paid today for this share = $19.0148.