Question

Please post the work:

28.

-United Lighting ltd.  just paid an annual dividend of $3.10 a share that  is expected to grow at 4 percent per year. What is an investor expected to pay per share if the market rate of return for similar risky assets is 12 percent?

A.

$37.33

B.

$38.16

C.

$38.83

D.

$40.30

E.

$42.00

Answer 1

Answer: Option-(D): $40.30 Reason: Stock price today = (Recent annual dividend x (1 + Growth rate) / (Required rate of return - Growth rate). Recent annual dividend Growth rate Required rate of return Stock price today $3.10 4% 12% $40.30 ($3.10 x (1 + 4%)/(12% -4%) = $3.224 / 8% = $3.224 / 0.08 = $40.30]

Answer 2

SOLUTION :

Current dividend, D0 = 3.10 ($)

Dividend growth rate, g = 4% = 0.04

Market rate of return, r = 12 % = 0.12

So, as per Dividend constant growth Discount Model :

Expected price currently, P0 

= D0(1+g) / (r - g) 

= 3.10(1 + 0.04) / (0.12 - 0.04)

= 40.30 ($)

Amount that can be paid per share = Option D. $40.30 (ANSWER).