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Zolol [24]
3 years ago
12

Dividends-R-Us, Corp. is paying a dividend of $3 a share today. It is expected that the company will continue its policy of incr

easing its dividend 8% a year every year. If you require a 14% rate of return to invest in this company, what is the maximum amount you would be willing to pay for a share of the company’s stock?
Business
1 answer:
leonid [27]3 years ago
5 0

Answer:

Amount for each stock to be paid at maximum = $54

Explanation:

Using Dividend growth model, we have,

P_0 = \frac{D_1}{K_e - g}

Where P_0 = Expected price of share today

D_1 = Dividend to be paid at this year end

= D_0 + g

K_e = Required return on investment

g = Growth rate

Therefore,

D_1 = = $3 + 8% = $3.24

P_0 = \frac{3.24}{0.14-0.08}

P_0 = $54

Therefore, current price for this share or sock to be paid = $54 per share.

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