Question

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

Answer 1

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.