MJ Enterprises stock traditionally provides an average rate of return of 11.6 percent. The firm’s next annual dividend is projected at $2.40 with future increases of 3 percent per year. What price should you pay for this stock is you are satisfied with the firm’s average rate of return?

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stokholm stokholm · Answer 1 · 2019-07-30T12:48:37+02:00

Answer:

Firm's stock price shall be $27.91

Explanation:

Using dividend growth model we have,

[tex]P{_0} = \frac{D{_1}}{K{_e} - g}[/tex]

Where P[tex]{_0}[/tex] = Current Price of stock

D[tex]{_1}[/tex] = Dividend to be paid at year end = $2.40

K[tex]{_e}[/tex] = Expected return = 11.6%

g = Expected growth = 3%

Thus P[tex]{_0}[/tex] = [tex]\frac{2.40}{11.6 - 3}[/tex] = $27.91

Firm's stock price shall be $27.91