Question

Rosita's announced that its next annual dividend will be $1.65 a share and all future dividends will increase by 2.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock if you require a 12 percent rate of return?
a. $17.37
b. $16.94
c. $17.80
d. $15.46
e. $13.75

Answer 1

Answer:

$17.37

Explanation:

Rosita's made an announcement that the next annual dividend payment will be $1.65 per share

The dividend will increase by 2.5% annually

= 2.5/100

= 0.025

The rate of return is 12%

= 12/100

= 0.12

Therefore, the maximum amount that should be paid to purchase this stock can be calculated as follows

Po= $1.65/(0.12-0.025)

= $1.65/0.095

= $17.37

Hence the maximum amount that should be paid to purchase a share of the stock is $17.37