Question

Lauren Corporation will pay a dividend of $3.10 next year. The company has stated that it will maintain a constant growth rate of 4.2 percent a year forever. a. If you want a return of 12 percent, how much will you pay for the stock? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. If you want a return of 8 percent, how much will you pay for the stock? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

Answer 1

To determine the price you would pay for a stock based on a desired return, use the Gordon Growth Model, which considers the next year's dividend, the required rate of return, and the growth rate of dividends. For a 12 percent return, the price of Lauren Corporation's stock would be $39.74, and for an 8 percent return, the price would be $81.58.

Step-by-step explanation:

To determine how much you would pay for Lauren Corporation's stock if you want a return of 12 percent, the Gordon Growth Model can be used, which is expressed by the following formula:

P = D1 / (r - g)

Where:

• P is the price of the stock.
• D1 is the dividend next year, which is $3.10.
• r is the required rate of return, which is 12 percent or 0.12.
• g is the growth rate, which is 4.2 percent or 0.042.

Using this formula:

P = 3.10 / (0.12 - 0.042) = 3.10 / 0.078 = $39.74

Therefore, if you want a return of 12 percent, you will pay $39.74 for the stock.

Similarly, if you want a return of 8 percent, the stock price can be calculated:

P = 3.10 / (0.08 - 0.042) = 3.10 / 0.038 = $81.58

So, if you want a return of 8 percent, you would be willing to pay $81.58 for the stock.

Answer 2

To calculate the value of the stock, use the formula: Price = Dividend / (Required Rate of Return - Growth Rate). With a required rate of return of 12%, the stock price would be $39.74. With a required rate of return of 8%, the stock price would be $81.58.

Step-by-step explanation:

To calculate the value of the stock, we can use the formula for the price of a stock with constant growth: Price = Dividend / (Required Rate of Return - Growth Rate).

a. With a required rate of return of 12% and a constant growth rate of 4.2%, we can calculate the price of the stock as follows: Price = $3.10 / (0.12 - 0.042) = $3.10 / 0.078 = $39.74.

b. With a required rate of return of 8% and a constant growth rate of 4.2%, we can calculate the price of the stock as follows: Price = $3.10 / (0.08 - 0.042) = $3.10 / 0.038 = $81.58.