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Metroplex Corporation will pay a $5.40 per share dividend next year. The company pledges to increase...

Metroplex Corporation will pay a $5.40 per share dividend next year. The company pledges to increase its dividend by 3.80 percent per year indefinitely. Required: If you require an 13.70 percent return on your investment, how much will you pay for the company's stock today?

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Answer #1

The question is solved using the dividend discount model.

Next year’s dividend= $5.40

Dividend growth rate= 3.80%

Required return= 13.70%

Price of the stock today=D1/(r-g)

Where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of the stock today= $5.40/ 0.13.70 – 0.0380

                                             = $5.40/ 0.0990   = $54.55.

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