Question

How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and you require a 10 percent rate of return

Answer 1

Answer:

The maximum that should be paid for the stock today is $8.47

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,

• Do is dividend today

• g is the growth rate

• r is the required rate of return

P0 = 0.7 * (1+0.016)  /  (0.10 - 0.016)

P0 = $8.466666667 rounded off to $8.47