Question

You are considering buying stock in Bergkamp Mining. Its most recent dividend is $3.50 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 If Growth Rate is 1%

$\large Value of Stock = \frac{D_{0}(1+G)}{Rate of Return- G}$

$\bg_white \large Value of Stock = \frac{3.5(1+0.01)}{0.12- 0.01}$

  $= \frac{3.535}{0.11}$

= $ 32.14

Highest Price If Growth Rate is 6%

$\large Value of Stock = \frac{D_{0}(1+G)}{Rate of Return- G}$

Valueof Stock = 3.5(1+0.06) 0.12 - 0.06

  $= \frac{3.71}{0.06}$

= $ 61.83

Value of Stock is Growth Rate is 6% = $ 61.83

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