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This afternoon, Northern Railways paid an annual dividend of $2.44 per share. The company has been increasing the dividends by 15 percent each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 16 percent?

a. $7.87
b. $207.40
c. $36.60
d. $6.69
e. $280.60

Respuesta :

Shahzaibfaraz

Answer:

P0 = $280.60

Option e is the correct answer.

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,

  • D0 is the dividend today or paid recently
  • D0 * (1+g) is dividend expected for the next period /year
  • g is the growth rate
  • r is the required rate of return  

P0 = 2.44 * (1+0.15) / (0.16 - 0.15)

P0 = $280.60

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