Question

Alhandro, Inc. just paid an annual dividend of $1.03. They have been increasing their dividends by 4% annually and are expected to continue doing so. How much can they expect to receive for each new share of stock offered if investors require an 11% rate of return? A) $9.36 B) $9.74 C) $14.71 D) $15.30 E) $15.91

Answer 1

As per Dividend Discount Model:

Share price = Expected dividend/ (Rate of return – Constant growth in dividend)

                   = ($ 1.03 x 1.04)/ (0.11 – 0.04)

                   = $ 1.0712/0.07

                   = $ 15.30285714 or $ 15.30

Alhandro, Inc. can receive $ 15.30 for each new share of stock.

Hence option “D) $ 15.30” is correct answer.