Question

Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend, to be paid in three days, will be $1.65 a share. Secondly, all dividends after that will increase by 1.5 percent for the foreseeable future. What is the maximum amount you should pay to purchase a share of this stock today if you require a 16 percent rate of return?

Answer 1

If we assume compounding for 3 days
=1.65/(1+16%)^(3/365)*1/(1-1.015/1.16)
=13.18

If we dont assume compounding for 3 days
=1.65*1/(1-1.015/1.16)
=13.20