High School

Saine Corporation will pay a $2.50 per share dividend next year. The company pledges to increase its dividend by 3 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?

(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer :

The price you would pay for Saine Corporation's stock today is $25.75. The stock price of Saine Corporation today, we can use the dividend discount model (DDM).

The DDM calculates the present value of all future dividends. To calculate the dividend expected next year, which is $2.50 (given in the problem statement). Then we can calculate the dividend expected in the following years using the 3 percent annual growth rate. Assuming the growth rate continues indefinitely, the dividend in the subsequent years will be $2.50 * (1 + 3%) = $2.575.

Next, we need to determine the present value of these future dividends. We divide the expected dividend for the next year ($2.50) by the required return on investment (10% or 0.10) to obtain the present value of the perpetuity. PV = Dividend / Required return, PV = $2.575 / 0.10, PV = $25.75,

Learn more about dividend discount model (DDM) here:

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