Healthy Foods just paid its annual dividend of $1.45 a share.The firm recently announced that all future dividends will be increased by 2.8 per cent annually.What is one share of this stock worth to you if you require a 14 per cent rate of return?

Question

Quizplus · Accepted Answer

The stock price can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing perpetuity): P = D1 / (r - g), where D1 is the next year's dividend, r is the required rate of return, and g is the growth rate. D1 = $1.45 * (1 + 0.028) = $1.4916. P = $1.4916 / (0.14 - 0.028) = $13.31.

Healthy Foods Just Paid Its Annual Dividend of $1