Question

Hudson Corporation will pay a dividend of $3.28 per share next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company’s stock today?

Answer 1

Answer:

52.48

Explanation:

the key to answer this is to keep in mind that we are giving the value of the increasing dividend 3.75%, so the theory says that present value of a perpetuity payment is as follows:

$PV=\frac{dividend}{i-k}$

where dividend is the payment as dividend, i is the interest rate and k is the increment of the dividend, so we have:

$PV=\frac{3.28}{0.1-0.0375}$

$PV=52.48$

so you will pay 52.48 for this stock today