Question

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?

Answer 1

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.