What price would an individual would be willing to pay for a stock that currently pays a $5.00 annual dividend if the individual expects the dividend to grow by 4% (0.04) per year and the individual has a discount rate of 6.0% (0.06)?
What will be an ideal response?
We can calculate the Ptoday by using equation 8 from the chapter: The equation,
Ptoday = 
where i is the discount rate, or in this case 0.06; g is the growth rate of the dividend, or in this case 0.04; and the Dtoday is the current dividend of $5.00. Inserting these values into the equation we solve for Ptoday and obtain $260.00
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