Exhibit 11.5
Use the Information Below for the Following Problem(S)
The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7 percent for the next three years and the stock will then reach $25.00 per share.
-Refer to Exhibit 11.5.How much should you be willing to pay for the stock if you require a 16 percent return?
A) $17.34
B) $18.90
C) $19.09
D) $19.21
E) None of the above

Question

Quizplus · Accepted Answer

$$\begin{aligned}
P & = \frac { 1.25 ( 1.07 ) } { 1.16 } + \frac { 1.25 ( 1.07 ) ^ { 2 } } { ( 1.16 ) ^ { 2 } } + \frac { 1.25 ( 1.07 ) ^ { 3 } } { ( 1.16 ) ^ { 3 } } + \frac { 25.00 } { ( 1.16 ) ^ { 3 } } \
& = \$ 1.153 + \$ 1.064 + \$ 0.981 + \$ 16.016 = \$ 19.21
\end{aligned}$$

Exhibit 11.5 Use the Information Below for the Following Problem(S)