Plastics, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2.25 percent annually. How much are you willing to pay for one share of this stock if you require a 16 percent return?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the future dividends is $13.45. The present value of a growing perpetuity is calculated as the dividend divided by the required return minus the growth rate. In this case, the dividend is $1.85, the required return is 16%, and the growth rate is 2.25%. Plugging these values into the formula, we get:PV = D / (r - g)PV = $1.85 / (0.16 - 0.0225)PV = $13.45