Today, the Big Foot Shoe Company paid dividends of $1.50 per share of common stock. You are considering purchasing some stock in this company but don’t want to pay to much for it. If an appropriate discount rate for this stock is 12%, what would be the price of the stock today under the following scenarios? (Note, if you purchased the stock today the first dividend you would receive would be in one year.):
Annual dividend payments would be constant and based on today’s dividend.
Annual dividend payments would be constantly growing at a rate of 3%, and based on today’s dividend.
What is the value of the growth (subtract a from b)?