Cape 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. a. If you want a return of 15 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. If you want a return of 8 percent, how much will you pay for the stock

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andromache andromache · Answer 1 · 2020-04-15T11:01:28+02:00

Answer:

a. $28.57

b. $85.72

Explanation:

The computation is shown below:

As we know that

a. Price of the stock = Next year dividend ÷ (Required rate of return - growth rate)

where,

Next year dividend is $3

Required rate of return is 15%

And, the growth rate is 4.5%

So, the price of the stock is

= $3 ÷ (15% - 4.5%)

= $3 ÷ 10.5%

= $28.57

b. Now if the required rate of return is 8%, so the price of the stock is

Price of the stock = Next year dividend ÷ (Required rate of return - growth rate)

where,

Next year dividend is $3

Required rate of return is 8%

And, the growth rate is 4.5%

So, the price of the stock is

= $3 ÷ (8% - 4.5%)

= $3 ÷ 3.5%

= $85.72