Question

Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. 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?

Answer 1

Answer:

$12.55

Explanation:

Using the dividend growth model to forecast the price of shares we have:

Step 1. Firstly we use the of the The dividend discount model (DDM)

This calculation is: D1 = D0 x (1 + g)

D1 = $1.15 x (1 + 2.6%) = $1.18.  

Where  

Do = Dividend now

D1 = Dividend in year 1

g = growth

Step 2: Price per share is found to be D(1) / (r - g)

Price = $1.18 / ( 12% - 2.6%) = $12.55

where:

Do = Dividend now

D1 = Dividend in year 1

g = growth

r = required return