Answered

Future Motors is expected to pay an annual dividend next year of $3.10 a share. Dividends are expected to increase by 1.85 percent annually. What is one share of this stock worth at a required rate of return of 15 percent?

Answer :

Answer: Price of stock = $23.57

Explanation:

Given that,

Expected to pay an annual dividend next year([tex]Div_{1}[/tex]) = $3.10 a share

Dividends are expected to increase by 1.85 percent annually

Required rate of return(r) = 15 percent

According to the constant growth dividend discount model,

 [tex]P_{0} = \frac{Div_{1}}{r - g}[/tex]

Where,

[tex]P_{0}[/tex] - Price of stock

g - Growth rate

[tex]P_{0} = \frac{3.10}{0.15 - 0.0185}[/tex]

                 = $23.57

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