Question

essica's pharmacy made two announcements concerning their common stock today. first, the company announced the next annual dividend will be $1.48 a share. secondly, all dividends after that will increase by 2.5 percent annually. what is the maximum amount you should pay to purchase a share of this stock if your goal is to earn a 12 percent rate of return? $12.33 $12.64 $13.27 $15.58 $15.97

Answer 1

To calculate the maximum amount you should pay to purchase a share of this stock, you need to use the dividend discount model (DDM). The DDM calculates the present value of all the future dividends, taking into account the required rate of return.

Step-by-step explanation:

To calculate the maximum amount you should pay to purchase a share of this stock, you need to use the dividend discount model (DDM). The DDM calculates the present value of all the future dividends, taking into account the required rate of return.

In this case, the annual dividend is $1.48 and it will increase by 2.5% annually. If your goal is to earn a 12% rate of return, you can calculate the present value of these dividends using the formula:

PV = D / (r - g)

Where PV is the present value of the dividends, D is the current dividend, r is the required rate of return, and g is the growth rate of the dividends.

Plugging in the values, we get:

PV = $1.48 / (0.12 - 0.025) = $15.97

Therefore, the maximum amount you should pay to purchase a share of this stock is $15.97.