#9 00 Sprint 5:47 PM ezto.mheducation.com C connect FIN 210: FIN 210 Fall 2015 T

Question

#9 00 Sprint 5:47 PM ezto.mheducation.com C connect FIN 210: FIN 210 Fall 2015 Tuesday instr Question 9 jof 6 10.00 points Problem 7-16 Constant-Growth Model (LO2) You believe that the Non-stick Gum Factory will pay a dividend of $2 on its common stock next year. Thereafter, you expect dividends to grow at a rate of 8% a year in perpetuity. If you require a return of 15% on your investment, how much should you be prepared to pay for the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.) hckpioe Hints References Book & Resources

Explanation / Answer

Price of a stock where dividends grow continuously is given by the gordon growth model

Here return required (r) = 15% ; growth rate (g) = 8%; Dividend Year 1(D1) = 2

Gordown growth model formula:

Price = D1 / ( r - g )

Or Price = 2 / ( 15% - 8% ) = 2 / 0.07 = $28.57

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