The Brown Company just announced that it will be increasing its annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. How much would you be willing to pay
For one share of the Brown Company stock if you require a 12% rate of return?

Question

Quizplus · Accepted Answer

To find the price of the stock, use the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the dividend next year ($1.68), r is the required rate of return (12% or 0.12), and g is the growth rate (2.5% or 0.025). P = 1.68 / (0.12 - 0.025) = 1.68 / 0.095 = $17.68.

The Brown Company Just Announced That It Will Be Increasing