Question

PLastics INc will pay an annual dividend of $1.85 Next year. THey just announced that future dividends will be increasing by 2.25% annually. How much are you willing to pay for one share of this stock if yoyu require a 16% return?a. 13.45b. 13.61c. 13.76d. 14.02e. 14.45

Answer 1

In order to find the intrinsic value of a stock or how much we should pay for the stock we can use the dividend discount method. The formula is

D*(1+G)/(R-G).

D= Dividend = 1.85

G= Growth Rate= 2.25%

R= Required return= 16%

In order to find the price we will input these values in the formula

1.85*(1+0.0225)/(0.16-0.0225= 13.76

We will be willing to pay $13.76 for this stock.

Ans c. 13.76

Step-by-step explanation: