The brown company just announced that they will be increasing their annual dividend to $1.68 next year and that future dividends will be increased by 2.5% annually. how much would you be willing to pay for one share of the brown company stock if you require a 12% rate of return?

Current price of Brown Company = $17.68

Explanation:

Using dividend growth model we have

Where, = Current price of share

= Dividend to be paid at year end = $1.68 as provided,

= Cost of equity or expected return on equity = 12% as provided,

g = growth rate = 2.5% as provided,

Now putting the values in above we have

Current price of Brown Company = $17.68

This is the price every person would be willing to pay at current level.

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