Question

Poulter Corporation will pay a dividend of $3.25 per share next year. The company pledges to increase its dividend by 5.1 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stock today?

Answer 1

Answer:

current price of the stock P = $55.084

Explanation:

given data

dividend D1 = $3.25 per share

Dividend growth rate g = 5.1 % = 0.051

Required rate of return r = 11 % = 0.11

solution

We can find the price of the company stock today by using Gordon's Growth Model  that is

current price of the stock P =  $\frac{D1}{r-g}$     ..................1

here D1 is dividend   and r is rate of return and g is growth rate

so here value in equation 1 we get

current price of the stock P =  $\frac{3.25}{0.11 - 0.051}$

current price of the stock P = $55.084