Question

You are considering buying stock in Bergkamp Mining. Its most recent dividend is $2.50 and its dividends have grown at an average annual rate of 4% over the last 10 years. However, the annual dividend growth has been as low as 1% in some years and as high as 6%. You want a 12% return from this stock. Round your answers to two decimals. What is the highest price you would pay for a share if you believe dividends will grow at 1%? What is the highest price you would pay for a share if you believe dividends will grow at 6%?

Answer 1

Highest Price When Dividend grows at 1%

Value of Stock =

D. (1+G Rateof Return - G

= $\large \frac{2.5(1+0.01)}{0.12- 0.01}$

= $ 22.95

Highest Price When Dividend grows at 6%

Value of Stock =

D. (1+G Rateof Return - G

= $\bg_white \large \frac{2.5(1+0.06)}{0.12- 0.06}$

= $ 44.17

NOTE: The answer to your question has been given below/above. If there is any query regarding the answer, please ask in the comment section. If you find the answer helpful, do upvote. Help us help you.