Question

You have decided that you would like to own some shares of GH Corp. but need an expected 12% rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend per share to buy GH stock if the company pays a constant $3.50 annual dividend per share?

Answer 1

Share price = 29.16

Step-by-step explanation:

Given:

Dividend paid = $3.50

Required rate of return = 12% = 12/100 = 0.12

Growth rate = 0%

Find:

Share price = ?

Computation:

⇒ Share price = Dividend paid / [Required rate of return - Growth rate ]

⇒ Share price = $3.5/(0.12-0)

⇒ Share price = 29.16