Michael\'s, Inc. just paid $2.65 to its shareholders as the annual dividend. Sim
ID: 2653060 • Letter: M
Question
Michael's, Inc. just paid $2.65 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.70 percent. If you require a rate of return of 9.9 percent, how much are you willing to pay today to purchase one share of Michael's stock?
$17.96
$69.34
$33.35
$28.29
$66.69
Michael's, Inc. just paid $2.65 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.70 percent. If you require a rate of return of 9.9 percent, how much are you willing to pay today to purchase one share of Michael's stock?
Explanation / Answer
Answer:
Calculation of Current Price of the share using dividend growth model :
Current Price = Expected Dividend / (Required rate – Growth rate)
Expected Dividend = Current Dividend * (1+ growth rate )
= 2.65 * (1+5.7%)
=$2.80105
Hence
Current Price = 2.80105 /(9.9% -5.7%)
= $66.69
Hence we are willing to pay $ 66.69 today to purchase one share of Michael's stock