Question # 15.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?
Projected dividends next 3 years:
• Selling price for stock= $40
• D0= The dividend payment in current period= $1.25
• g= The constant growth rate of dividend
• n= Number of period = 3yrs
Formula= D0(1+g)
Year 1 ($1.25 x 1.08) = $1.35
Year 2 ($1.35 x 1.08) = $1.46
Year 3 ($1.46 x 1.08) = $1.58
Required rate of return 12%
Growth rate of dividends 8%
The Present value of stocks=D1 + D2 +D3+ Selling Price
(1+k)1 (1+K)2 (1+k)3 (1+k)3
PV of stocks=$1.35 + $1.46 + $1.58 + $40
(1+0.12)1 (1+ 0.12)2 (1+0.12)3 (1+0.12)3
PV of stocks=$1.35 + $1.46 + $1.58 + $40
1.121.2544 1.4049 1.4049
PV of stocks =$1.21+ $1.16+ $1.12 +$28.47
PV of stocks = $31.9657/ $31.97
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?
Vj= D1
(k-g)
Vj= $1.35
0.12-0.08