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A stock valuation problem with growth of dividends: what would you pay for the stock?

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A corporation paid a cash dividend of $0.75 for the fiscal year just completed. It is estimated that this firm's dividends will grow at 6% per year for the foreseeable future. If you are considering buying this firm's common stock, and, because of the risks involved, require a return of at least 9%, what is the most you should be willing to pay for this stock?

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Solution Summary

The solution states the formula to be used, then solves the problem.

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To answer this question you could use the constant growth dividend discount model, that is:


Where P0 is the fair price for the firm's stock (or the price you should be willing to pay for the stock), D1 is the ...

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