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

Price for company's stock today = $54

Step-by-step explanation:

Using dividend growth model, we have

`P_0 = (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 = (3.24)/(0.14 - 0. 08)`

`P_0 = $54`

Thus price to be paid on current day = $54