Solar Energy will pay an annual dividend of $1.93 per share next year. The company just announced that future dividends will be increasing by 1.6 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 11.75 percent?

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing perpetuity): P = D1 / (r - g), where D1 is the dividend next year ($1.93), r is the required rate of return (11.75% or 0.1175), and g is the growth rate (1.6% or 0.016). Plugging in the values: P = 1.93 / (0.1175 - 0.016) = $19.01.

Solar Energy Will Pay an Annual Dividend of $1