Question

Boeing made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Boeing's stock if your goal is to earn a 10% rate of return?

Answer 1

The maximum that you should be willing to pay for a stock of Boeing today is $36

Step-by-step explanation:

The stock has become a constant growth stock as the stocks will grow by a constant percentage of 4%. The constant growth model of the DDM will be used to estimate the price of the stock today.

The formula for constant growth model is,

P0 = D1 / r - g

Where,

• D1 is the dividend expected for the next period
• r is the required rate of return
• g is the growth rate in dividends

The fair price of boeing stock today according to this model is,

P0 = 2.16 / 0.1 - 0.04

P0 = $36

The maximum that you should be willing to pay for a stock of Boeing today is $36