Wesen Corp. will pay a dividend of $4.30 next year. The company has stated that

Question

Wesen Corp. will pay a dividend of $4.30 next year. The company has stated that it will maintain a constant growth rate of 4.75 percent a year forever.

If you want a return of 16 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Current stock price            $

If you want a return of 12 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Current stock price            $

References

eBook & Resources

WorksheetLearning Objective: 07-01 Assess how stock prices depend on future dividends and dividend growth.

Difficulty: 1 Basic

Explanation / Answer

If you want a return of 16 percent,

Current stock price = Expected Dividend/(Required Rate-growth rate)

Current stock price = 4.30/(16%-4.75%) = $38.22

Current stock price = $38.22

If you want a return of 12 percent

Current stock price = Expected Dividend/(Required Rate-growth rate)

Current stock price = 4.30/(12%-4.75%) = $59.31

Current stock price = $ 59.31

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