You are interested in investing in the stock of ABC company. The stock is expected to pay a yearly dividend of $1.60 per share next year, with dividends increasing 3% per year after that. The market rate of return on similar stock is 8%. What is the current value per share of the stock? What would the value be if the market rate of return went up to 11%?
Suppose the actual price of ABC stock from the previous question is $40 per share. Assuming that the market rate of return on similar stock is still 8%, would you want to buy it at this price? Why or why not? Calculate the stock’s actual rate of return as part of your answer.