Alexander Corp. will pay a dividend of $3.00 next year. The company has stated t

Question

Alexander Corp. will pay a dividend of $3.00 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever.

If you want a return of 15 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).)

Requirement 2:

If you want a return of 8 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).)

If you want a return of 15 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).)

Requirement 2:

If you want a return of 8 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).)

Explanation / Answer

Hi,

Please find the answer as follows:

Requirement 1:

Price of the Stock = D1/(ke - g)

D1 = 3

Ke = 15%

g = 4.5%

Price of the Stock = 3/(.15 - .045) = 28.57

Answer is 28.57.

Requirement 2:

Price of the Stock = D1/(ke - g)

D1 = 3

Ke = 8%%

g = 4.5%

Price of the Stock = 3/(.08 - .045) = 85.71

Answer is 85.71.

Thanks.

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