Question

Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?

Answer 1

Answer:

• What is the maximum amount you should pay to purchase a share of Angelina's stock.

    $36,00

Explanation:

The dividend discount model state that the price of a stock should be the result of the Present Value of all of its future dividends, the Gordon growth model indicates that:  

Price per Share = D / (r - g)  = $2,16 / (0,10-0,04) = $36

Where:

D = the estimated value of next year's dividend  

r = The required rate of return

g = the constant growth rate

To this case the value is: $2,16 / (0,10-0,04) = $36