PLEASE PROVIDE STEP BY STEP SOLUTIONS Michael\'s, Inc. just paid $1.95 to its sh

Question

PLEASE PROVIDE STEP BY STEP SOLUTIONS

Michael's, Inc. just paid $1.95 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.30 percent. If you require a rate of return of 8.5 percent, how much are you willing to pay today to purchase one share of Michael's stock?

$50.38

$24.21

$48.43

$15.89

$23.93

Michael's, Inc. just paid $1.95 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.30 percent. If you require a rate of return of 8.5 percent, how much are you willing to pay today to purchase one share of Michael's stock?

Explanation / Answer

Stock price = D1÷(r-g)

D1 is next expected dividend

r is cost of common stock

g is growth rate

= $1.95×(1+4.3%)÷(8.5%-4.3%)

= $48.43

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