Question

The Bradshaw Company's most recent dividend was $6.75. The historical dividend payment by the company shows a constant growth rate of 5 percent per year. What is the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent?

Answer 1

$236.25

Step-by-step explanation:

Given that,

Recently dividend paid, D0 = $6.75

Growth rate of dividend, g = 5 percent per year

Required rate of return, rr = 8 percent

Therefore, the stock price is calculated as follows:

= [D0 × (1 + g)] ÷ (rr - g)

= [6.75 × (1+5%)] ÷ (8% - 5%)

= $236.25

Hence, the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent is $236.25.