Alexander Corp. will pay a dividend of $3.10 next year. The company has stated t

Question

Alexander Corp. will pay a dividend of $3.10 next year. The company has stated that it will maintain a constant growth rate of 4.75 percent a year forever. Requirement 1: If you want a return of 16 percent, how much will you pay for the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current stock price $ Requirement 2: If you want a return of 10 percent, how much will you pay for the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current stock price $

Explanation / Answer

Value of stock = D1/ (k - g)
where:
D1 = next year's expected annual dividend per share
k = the investor's discount rate or required rate of return, which can be estimated using the Capital Asset Pricing Model or the Dividend Growth Model (see Cost of Equity)
g = the expected dividend growth rate (note that this is assumed to be constant

1. P = 3.10/(16%-4.75%) = $27.56

2. P = 3.10/(10%-4.75%) = $59.05

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