Last year, Hansen Delivery paid an annual dividend of $3.20 per share. The company has been reducing the dividends by 10 percent annually. How much are you willing to pay to purchase stock in this company if your required rate of return is 11.5 percent?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected dividend for next year:
Dividend next year = Dividend this year * (1 - Reduction rate)
Dividend next year = $3.20 * (1 - 0.10) = $2.88

Next, we can use the dividend discount model to calculate the intrinsic value of the stock:

Intrinsic value = Expected dividend / (Required rate of return - Dividend growth rate)
Intrinsic value = $2.88 / (0.115 - 0.10) = $56.80

Therefore, the price we are willing to pay for one share of Hansen Delivery is:

Price = Intrinsic value / Number of shares
Price = $56.80 / 4 = $14.20

The closest option to our calculated price is C, $13.40. Therefore, the best answer is C.

Last Year, Hansen Delivery Paid an Annual Dividend of $3