Hudson Corporation will pay a dividend of $3.60 per share next year. The company pledges to increase its dividend by 4.60 percent per year indefinitely. If you require a return of 7.00 percent on your investment, how much will you pay for the company's stock today

The maximum that should be paid for the stock of the company today is $146.64

Explanation:

The current price of the stock can be calculated using the constant growth model of DDM. The DDM values the stock based on the present value of the expected future dividends from the stock.

The formula for the price of the stock today under the constant growth model is,

P0 = D0 * (1+g) / (r - g)

Where,

D0 is the most recent dividend paid

D0 * (1+g) is the dividend expected to be paid next period

r is the required rate of return

g is the growth rate in dividends

As we don't have a D0 but instead are given a D1, the constant growth rate will be applied from year 2 and we will calculate the price of the stock at year 1 using the constant growth model and discount is back one year to calculate the price of the stock today.

P1 = D1 * (1+g) / r - g

P1 = 3.6 * (1+0.046) / (0.07 - 0.046)

P1 = $156.9

Price of the stock today is,

P0 = P1 / (1+r)

P0 = 156.9 / (1+0.07)

P0 = $146.635514 rounded off to $146.64