College

Saine Corporation will pay a $3.06 per share dividend next year. The company pledges to increase its dividend by 6 percent per year indefinitely. If you require a return of 12 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 :

Answer:

$51

Explanation:

Given that,

Dividend paid next year, D1 = $3.06 per share

Growth rate of dividend per year, G = 6 percent per year

require a return on investment, Ke = 12 percent

Stock Price = D1 ÷ (Ke - G)

= 3.06 ÷ (0.12 - 0.06)

= $51

Therefore, I'll pay $51 for the company’s stock today.

Final answer:

To determine the value of the stock today, we need to calculate the present value of the future dividends. The present value of perpetuity is $51.

Explanation:

To determine the value of the stock today, we need to calculate the present value of the future dividends. The first step is to calculate the dividend for the next year, which is $3.06 per share. Then, we need to calculate the present value of the perpetual stream of increasing dividends. The formula to calculate the present value of perpetuity is PV = D / (r - g), where PV is the present value, D is the dividend, r is the required return, and g is the growth rate. In this case, the required return is 12% and the growth rate is 6%. Plugging in these values, we get PV = $3.06 / (0.12 - 0.06). The present value of perpetuity is therefore $51. So, you should pay $51 for the company's stock today.