Answer:
The maximum that should be paid for this stock today is $9.83
Step-by-step explanation:
The price of a stock whose dividends are expected to grow at a constant rate forever can be calculated using the constant growth model of DDM. The model bases the price of a stock on the present value of the expected future dividends. The formula for price today under this model is,
Price = D1 / r - g
Where,
- D1 is the dividends expected for the next period or D0 * (1+g)
- r is the required rate of return
- g is the growth rate in dividends
Price = 1.23 * (1+0.031) / (0.16 - 0.031)
Price = $9.83