Uptown Homes just paid a $1.60 annual dividend. This dividend is expected to increase by 3% per year. If you are planning on buying 1,000 shares of this stock one year from now, how much should
You expect to pay per share if the market rate of return for this type of security is 13.5% at the time
Of your purchase?

Question

Quizplus · Accepted Answer

To calculate the expected price per share, we need to use the dividend discount model formula:
P = D/(r-g)
where P is the expected price per share, D is the dividend, r is the market rate of return, and g is the expected growth rate of the dividend.

In this case, we know:
- D = $1.60 (the current dividend)
- g = 3% (the expected annual increase in the dividend)
- r = 13.5% (the market rate of return)

Plugging these values into the formula, we get:
P = $1.60/(0.135 - 0.03)
P = $16.17

Therefore, we can expect to pay $16.17 per share one year from now if we are planning on buying 1,000 shares of this stock. The correct choice is D.

Uptown Homes Just Paid a $1