Thursday, 31 July 2014

Nofal Corporation will pay a $4.65 per share dividend next year. The company pledges to increase its dividend by 7 percent per year, indefinitely.

Nofal Corporation will pay a $4.65 per share dividend next year. The company pledges to increase its dividend by 7 percent per year, indefinitely.

Required:
If you require a return of 11 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)


  Current stock price $  


Explanation:
Using the constant growth model, we find the price of the stock today is:
P0 = D1 / (Rg)
P0 = $4.65 / (.11 – .0700)
P0 = $116.25