Question

a company made two announcements concerning its common stock today. first, the company announced that the next annual dividend will be $2.45 a share. secondly, all dividends after that will decrease by 3.5 percent annually. what is the maximum amount you should Pay if you require a a 7 percent rate if return?

16.29, 17.64, 18.96, 23.33

Answer 1

Next year Dividend(D1) = $ 2.45 per share

Growth rate will be decreasing (g) = 3.5%

Required rate of return (ke) = 7%

calculate the Price per share:

D D1 (1+9) (1 + ke) 1" (ke-g) ce (1+ke)

2.45 2.45(1+(-0.035)) (1+0.07)"(0.07-(-0.035))*(1+0.07)1

2.45 2.4571-0.035) (1+0.07)"(0.07 +0.035)*(1+0.07) 1

Price = $ 2.2897 + $ 21.0436

Price = $ 23.33

So, the maximum amount you should Pay is $ 23.33

Answer 2

ANSWER :

Given :

r = 7% = 0.07

D1 = 2.45 ($)

g = - 3.5% = - 0.035

Now,

Value of the stock currently 

= D1 / (r - g)

= 2.45 / (0.07 - (-0.035))

= 23.33 ($)

Maximum that can be paid per share : 23.33 ($) (ANSWER)