Earthly Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8% each year forever. What is the fair price of the stock if an investor requires a 14% rate of return? Group of answer choices$12.95$13.31$13.68$14.07

Question
Asked Nov 3, 2019
Earthly Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8% each year forever. What is the fair price of the stock if an investor requires a 14% rate of return?
 
Group of answer choices
$12.95
$13.31
$13.68
$14.07
check_circleExpert Solution
Step 1

We need to use dividend growth model to solve the question. It is a valuation model that determines the value of a stock using the required return and the growth rate. 

Step 2
We will use the following formula to determine the fair price of the stock.
Price (Year end dividend)
(Required return-Growth rate)
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We will use the following formula to determine the fair price of the stock. Price (Year end dividend) (Required return-Growth rate)

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Step 3
Annual dividend is $1.45 and it is expected to grow at a rate of 2.8% forever
Year end dividend=1.45 x (1+2.8%) =1.4906
Required return=14%
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Annual dividend is $1.45 and it is expected to grow at a rate of 2.8% forever Year end dividend=1.45 x (1+2.8%) =1.4906 Required return=14%

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