Caan Corporation will pay a $2.82 per share dividend next year. The company pledges to increase its dividend by 3 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company’s stock today?

Problem 8-4 Stock Values [LO1]

Caan Corporation will pay a $2.82 per share dividend next year. The company pledges to increase its dividend by 3 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Stock price

$

 

Explanation:

Using the constant growth model, we find the price of the stock today is:

P0 = D1 / (R − g)

P0 = $2.82 / (.10 − .03)

P0 = $40.29