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Monn Company, a producer of fine liqueurs, has earnings and common stock dividends have been growing at an annual rate of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of $4.00. Assuming that Monn's common stock dividends continue growing at the past rate for the foreseeable future, determine the value of the company's common stock to an investor who requires a 13 percent rate of return on these securities.

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Answer:

The correct stock price is $46.22

Explanation:

Step 1. Given information.

Annual rate of growth (g) = 0.04

Annual dividend = 4.00

rate of return (i) = 0.13

Step 2. Formulas needed to solve the exercise.

  • Next dividend = annual rate of growth * annual dividend
  • Stock price = Next Dividend / (i - g)

where i is the rate of return and g is the growth rate .

Step 3. Calculation.

  • Next dividend = 4.00*(1.04) = 4.16
  • Stock price = 4.16/(0.13-0.04) = 46.22

Step 4. Solution.

So the correct stock price is $46.22

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