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The Buckeye Corporation expects to pay a dividend of $3.15 per share at the end of next year. The firm expects the dividend to continue growing at the rate of 8% per year for the foreseeable future. If you require a return of 13% per year, the most you should pay for this stock is ______.
A) $63.00
B) $62.00
C) $64.00
D) $61.00

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Answer:

A) $63.00

Explanation:

To find the current price of Buckeye Corporation's stock we can use the growth perpetuity formula:

current price of stock = current dividend / (required rate of return - dividend growth rate)

current price of stock = $3.15 / (13% - 8%) = $3.15 / 5% = $63