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solar energy, inc. will pay an annual dividend of $1.85 next year. the company just announced that future dividends will be increasing by 2 percent annually. how much are you willing to pay for one share of this stock if you require a 14 percent return?



Answer :

The price to be paid today for this share i.e., value of stock = $15.41

Using the dividend growth model:

The computation of the willing to pay for one share is shown below:

Value of the stock =  Next year dividend ÷ (Required rate of return - growth rate)

where,

Next year dividend is $1.85 per share

Required rate of return = 14%

And, the growth rate is 2%

So, the value of the stock is

= ($1.85) ÷ (14% - 2%)

= ($1.85) ÷ (12%)

= $15.41

Therefore, the price to be paid today for this share = $15.41

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