Question

richards retailers just paid an annual dividend of $1.20 and increases its dividend by 2.5 percent annually. you would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another three years. if you desire a rate of return of 10 percent, how much should you expect to pay for 100 shares when you can afford to buy this stock? ignore trading costs.

Answer 1

To calculate the price you should expect to pay for 100 shares of stock in Richards Retailers, you need to determine the expected future dividends and discount them back to present value using the desired rate of return of 10%.

Step-by-step explanation:

To calculate the price you should expect to pay for 100 shares of stock in Richards Retailers, you need to determine the expected future dividends and discount them back to present value using the desired rate of return of 10%.

First, calculate the future annual dividend after 3 years:

$1.20 * (1 + 0.025)^3 = $1.20 * 1.07689 = $1.29 (to the nearest cent).

Next, discount the future dividend back to present value:

$1.29 / (1 + 0.10)^3 = $1.29 / 1.331 = $0.97 (to the nearest cent).

Therefore, you should expect to pay approximately $0.97 per share for 100 shares of stock in Richards Retailers when you can afford to buy it.