Question

You are considering buying common stock in Grow On, Inc. You have projected that the next dividend the company will pay will equal $3.90 and that dividends will grow at a rate of 6.0% per year thereafter. If you would want an annual return of 25.0% to invest in this stock, what is the most you should pay for the stock now?

Answer 1

Answer:

$20.52

Explanation:

Given that

Estimated dividends for next period = $3.90

Required rate of return = 25%

Growth rate = 6%

The computation of Price of stock is given below:-

Price of stock = Estimated dividends for next period ÷ (Required rate of return - Growth rate)

= $3.90 ÷ (0.25 - 0.06)

= $3.90 ÷ 0.19

= $20.52

Therefore for computing the price of stock we simply applied the above formula.