Mickelson Corporation will pay a dividend of$3.14 per share next year. The company pledges to increase its dividend by 5 percent per year indefinitely. If you require a return of 12 percent on your investment, how much will you pay for the companys stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Stock price$

Introduction:

Investing in the stock market requires a careful assessment of a company’s financial performance, particularly its dividend payments. Mickelson Corporation, for instance, is planning to pay a dividend of $3.14 per share next year and aims to increase it by 5 percent each year. But how much should investors pay for the company’s stock to get a 12 percent return on investment?

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What is the current stock price of Mickelson Corporation?

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Description:

Mickelson Corporation is a company that is aiming to increase its dividend payout by 5 percent annually. Thus, investors are curious about how much they need to invest now to gain their desired return on investment. With a dividend of $3.14 per share, investors must calculate the present value of future dividend payments at 12% to determine the fair price they should pay for the company’s stock. This calculation takes into account the expected stream of income, the discount rate, and the number of periods. Based on this scenario, investors must carefully analyze the company’s financial position and its potential for future growth.

Objectives:

– To understand the concept of dividend and its impact on stock investment

– To learn how to calculate the present value of a stock based on future dividends

– To apply the formula to determine the stock price of Mickelson Corporation

Learning Outcomes:

By the end of this content, students should be able to:

– Define dividend and explain its significance in stock investment

– Calculate the present value of a stock using the formula

– Apply the formula to calculate the stock price of Mickelson Corporation based on its dividends and required rate of return

Heading: Introduction to Dividend and Stock Investment

Objectives:

– To introduce the concept of dividend and its role in stock investment

– To explain how dividend affects the value of a stock

– To highlight the importance of understanding dividend for stock investors

Learning Outcomes:

By the end of this content, students should be able to:

– Define dividend and its types

– Describe the impact of dividend on the value of a stock

– Explain why understanding dividend is important for stock investors

Heading: Method of Calculating Present Value of Stock

Objectives:

– To introduce the formula for calculating the present value of a stock

– To explain the various components of the formula and their significance

– To provide an example for calculating the present value of a stock

Learning Outcomes:

By the end of this content, students should be able to:

– Explain the formula for calculating the present value of a stock

– Identify the components of the formula and their significance

– Apply the formula to calculate the present value of a stock

Heading: Application of Formula to Calculate Stock Price of Mickelson Corporation

Objectives:

– To provide an example of using the present value formula to determine the stock price of a company

– To introduce the concept of required rate of return and its role in stock pricing

– To explain how dividends are used to determine the stock price of a company

Learning Outcomes:

By the end of this content, students should be able to:

– Apply the present value formula to calculate the stock price of Mickelson Corporation

– Explain the concept of required rate of return and its importance in stock pricing

– Discuss how dividends are used to determine the stock price of a company

Solution 1: Using the Constant Growth Model

To calculate the stock price of Mickelson Corporation today, we can use the constant growth model (also known as the Gordon model) which considers the company’s current dividend, projected growth rate, and required rate of return. Here’s how we can calculate the stock price:

Stock price = (Next year’s dividend / (Required rate of return – Growth rate))

Next year’s dividend = $3.14

Required rate of return = 12%

Growth rate = 5%

Stock price = ($3.14 / (0.12 – 0.05))

Stock price = $59.07

Therefore, the stock price of Mickelson Corporation today is $59.07.

Solution 2: Using the Dividend Discount Model

Alternatively, we can use the Dividend Discount Model (DDM) to calculate the stock price of Mickelson Corporation today. The DDM considers the company’s dividend payments over several years and estimates their present value, taking into account the required rate of return. Here’s how we can calculate the stock price:

Step 1: Calculate the present value of future dividend payments

Year | Dividend | Present Value Factor (PVF) | Present Value

—- | ——- | ———————– | ————

1 | $3.14 | 0.8929 | $2.81

2 | $3.30 | 0.7972 | $2.63

3 | $3.47 | 0.7118 | $2.47

4 | $3.64 | 0.6355 | $2.31

5 | $3.82 | 0.5674 | $2.17

… | … | … | …

Step 2: Calculate the sum of present values of future dividend payments

Sum of present values = $2.81 + $2.63 + $2.47 + $2.31 + $2.17 + …

Step 3: Calculate the present value of the stock using the sum of present values and required rate of return

Stock price = Sum of present values / (Required rate of return – Growth rate)

Required rate of return = 12%

Growth rate = 5%

Stock price = ($2.81 + $2.63 + $2.47 + $2.31 + $2.17 + …) / (0.12 – 0.05)

Stock price = $90.25

Therefore, the stock price of Mickelson Corporation today is $90.25.

Suggested Resources/Books:

1. “Investments: Analysis and Management” by Charles P. Jones

2. “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company Inc.

3. “Corporate Finance: A Practical Approach” by Michelle R. Clayman, Martin S. Fridson, and George H. Troughton

Similar Asked Questions:

1. How do I calculate the present value of a stock’s future dividend payments?

2. What is the relationship between a company’s dividend yield and its stock price?

3. How do I determine my required rate of return for investing in stocks?

4. What factors influence a company’s decision to increase its dividend payments?

5. How can I use the dividend discount model to value a stock?

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