Cost of GCC Stock and Percent growth
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Gentry Can Company's (GCC) latest annual dividend of $1.25 a share was paid yesterday and maintained its historic 7 percent annual rate of growth. You plan to purchase the stock today because you believe that the dividend growth rate will increase to 8 percent for the next three years and the selling price of the stock will be $40 per share at the end of that time.
a.How much should you be willing to pay for the GCC stock if you require a 12 percent return?
b.What is the maximum price you should be willing to pay for the GCC stock if you believe that the 8 percent growth rate can be maintained indefinitely and you require a 12 percent return?
c.If the 8 percent rate of growth is achieved, what will the price be at the end of Year 3, assuming the conditions in Part b?
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Solution Summary
The cost of GCC stock and percent growth is determined. The price at the end of year 3 is found.
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a) D0=1.25 g=8%
D1=D0*(1+g)
D2=D0*(1+g)
D3=D0*(1+g)
P3=40
r=12%
Value of stock = ...
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