A hw stock question.?

[widemouth_bass]

Gerold's Travel Service just paid $1.79 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 3.2 percent. If you require a 10.5 percent rate of return, how much are you willing to pay to purchase one share of this stock?

I don't know which ones to use.
If possible what is the formula for such problem e.g. D0 (1+G)/(1+R)
thanks in advance
my approach was: 1.79(1+.032) / (.105 - .032)
= 1.847 / .073
= $25.30

please tell if u got another approach

[takuwan_199]

Let's make sense of the problem. First, the annual dividend is $1.79 for that year. If it increases in yield by 3.2%, you must add on 3.2% that $1.79.

FDV= CDV* (1+ PCDV)

FDV=future Dividend Value
CDV=current Dividend Rate
1 = This implies that the future dividend is whatever it is today plus/minus the change
PCDV= Percent change in dividend value. In your case, increase in value of 3.2% ------> 0.032

Next, rate of return can be seen as your income (dividend) over price of the stock

RoR= D/P

RoR--- Rate of return - noted as a decimal
D---- Dividend (here place the future Dividend)
P--- Price that you will pay.

Rearrange to get
P= D/RoR

P will be your answer. Find it on your own now.

**Note that anything as a percentage HAS to be noted as a decimal