Question

Webster preferred stock pays an annual dividend of $6.20 a share. What is the maximum price you should pay today to purchase this stock if you desire a rate of return of 14.25 percent

Answer 1

Maximum price = $43.50

Step-by-step explanation:

According to the dividend valuation model , the current price of a stock is the present value of the expected future dividends discounted at the required rate of return

This principle can be applied as follows:

The value of cash flow the stock today is the present value of the future cash flow discounted at the required rate of return

The Di

P= D/ke

P= price of the stock today,- ?

D- annual dividend- 6.20

Ke- Cost of equity-14.25%

Price = 6.20/0/14.25=43.50

Maximum price = $43.50