Chapter 12.3, Problem 92AYU

To determine

To find: The price of the stock.

Answer to Problem 92AYU

The price of the stock should be $ 52.24.

Explanation of Solution

Given information:

Annual dividend (P) = $ 2.50

Increase in dividend (i) = 4% per year

Desired annual rate of return(r) = 11%

Calculation:

Calculate the Price.

  $\begin{array}{c}\text{Price}=4+4\left(\frac{1+0.025}{1+0.11}\right)+4{\left(\frac{1+0.025}{1+0.11}\right)}^2+\mathrm{........}\\ $ =4+4(0.9234234)+4{(0.9234234)}^2+\mathrm{........}$=\frac{4}{1-0.9234234}\\ =\frac{4}{0.0765766}\end{array}$

  $\begin{array}{c}\text{Price}=\$52.235278\\ =\$52.24(roundedoff)\end{array}$

Therefore, the price of the stock should be $ 52.24.