Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?

Question

Quizplus · Accepted Answer

To calculate the price per share, we use the constant growth model formula:

Price per share = Dividend / (Required rate of return - Dividend growth rate)

Plugging in the given values: 
Dividend = $1.42 
Dividend growth rate = 1.3% 
Required rate of return = 14.6%

Price per share = $1.42 / (14.6% - 1.3%) 
Price per share = $1.42 / 13.3% 
Price per share = $10.68

Therefore, the answer is B, $10.68.

Three Corners Markets Paid an Annual Dividend of $1