Question

1. 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:

Price for company's stock today = $54

Explanation:

Using dividend growth model, we have

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

Where, $P_0 = Current\ price\ of\ the\ stock$

$D_1 = Dividend\ to\ be\ paid\ at\ year\ end$

$K_e = Expected\ return\ on\ investment$

$g= growth\ in\ shares.$

D1 = D0 + g

= $3 + 8% = $3.24

$P_0 = \frac{3.24}{0.14 - 0. 08}$

$P_0 = 54$

Thus price to be paid on current day = $54