Chapter 12.3, Problem 91AYU

To determine

To find: The price of the stock.

Answer to Problem 91AYU

The price of the stock should be $ 72.67.

Explanation of Solution

Given information:

Annual dividend = $ 4.00

Increase in dividend = 3% per year

Desired annual rate of return = 9%

Calculation:

Calculate the Price.

  $\begin{array}{c}\text{Price}=4+4\left(\frac{1+0.03}{1+0.09}\right)+4{\left(\frac{1+0.03}{1+0.09}\right)}^2+\mathrm{........}\\ $ =4+4(0.944954128)+4{(0.944954128)}^2+\mathrm{........}$=\frac{4}{1-0.944954128}\\ =\frac{4}{0.0550458715}\end{array}$

  $\begin{array}{c}\text{Price}=\$72.66666667\\ =\$72.67(roundedoff)\end{array}$

Therefore, the price of the stock should be $ 72.67.