If XYZ stock recently paid a $5.00 dividend and is expected to grow at 10% per year, what will be the price you would be willing to pay if your required return is 15%?

To determine the price you would be willing to pay for XYZ stock based on its expected dividend growth, you can use the Gordon Growth Model (also known as the Dividend Discount Model). This model calculates the present value of an infinite series of future dividends that are expected to grow at a constant rate.

The formula for the Gordon Growth Model is:

[ P_0 = \frac{D_0 (1 + g)}{r - g} ]

Where:

• ( P_0 ) is the price of the stock today,
• ( D_0 ) is the most recent dividend paid,
• ( g ) is the growth rate of the dividend,
• ( r ) is the required return.

In this scenario:

• The most recent dividend ( D_0 = 5.00 ),
• The growth rate ( g = 10% = 0.10 ),
• The required return ( r = 15% = 0.15 ).

Substituting the values into the formula, we first find the expected dividend next year (( D_1 )):

[ D_1 = D_0 (1 + g) = 5.00 (1 + 0