Question

Johnson Enterprises intends to make a dividend payment of $3.25 per share next year. After this dividend payment, the firm is commited to raise its dividend by 5.1 percent per year, forever. Assuming you require a return of 15 percent on this investment, how much would you be willing to pay for this stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

I would be willing to pay $ 32.83 for each share of Johnson Enterprises

Step-by-step explanation:

The price per share= next year dividend/required rate of return-growth rate

next year dividend is $3.25

required rate of return is 15%

dividend growth rate in perpetuity is 5.1%

share price=$3.25/(15%-5.1%)

share price =$3.25/9.9%

share price=$3.25/0.099

share price=$ 32.83

The share can be sold today for $ 32.83 ,which is the present value of dividends payable in perpetuity(forever)