Business Degree Certification Practice Test

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Prepare for the Business Degree Certification Test with our comprehensive quiz featuring flashcards and multiple choice questions, complete with hints and explanations. Ace your exam with confidence!

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If Miller Brothers Hardware pays an annual dividend of $1.15 per share with a future increase of 2.6 percent annually, how much should you pay for one share if you require a 12 percent return?

$12.23
$12.55
$12.67
$12.72

The correct answer is: $12.55

To determine the price you should pay for a share of Miller Brothers Hardware based on the given dividend and required return, you can use the Gordon Growth Model, which is a method used to value a stock by taking into account the present value of its expected future dividends. First, you'll need to calculate the expected future dividends. The next year's dividend can be calculated by taking the current annual dividend of $1.15 and increasing it by the expected growth rate of 2.6 percent. This is done using the formula: Next Year's Dividend = Current Dividend × (1 + Growth Rate) Next Year's Dividend = $1.15 × (1 + 0.026) = $1.15 × 1.026 = $1.18 (approximately). Next, you will determine the price of the share using the Gordon Growth Model formula: Price = Next Year's Dividend / (Required Return - Growth Rate). In this case, the required return is 12 percent or 0.12, and the growth rate is 2.6 percent or 0.026: Price = $1.18 / (0.12 - 0.026) = $1.18 / 0.094 = $12.55 (approximately).