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Dividends-R-Us, Corp. is paying a dividend of $3 a share today. It is expected that the company will continue its policy of increasing its dividend 8% a year every year. If you require a 14% rate of return to invest in this company, what is the maximum amount you would be willing to pay for a share of the company’s stock?

1 Answer

4 votes

Answer:

Amount for each stock to be paid at maximum = $54

Step-by-step explanation:

Using Dividend growth model, we have,


P_0 = (D_1)/(K_e - g)

Where
P_0 = Expected price of share today


D_1 = Dividend to be paid at this year end

=
D_0 + g


K_e = Required return on investment

g = Growth rate

Therefore,


D_1 = = $3 + 8% = $3.24


P_0 = (3.24)/(0.14-0.08)


P_0 = $54

Therefore, current price for this share or sock to be paid = $54 per share.

User Arnis Juraga
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