Question

5- Miller Brothers Hardware paid an annual dividend of $0.95 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you reauire a 13 percent rate of return. how much are vou willing to pav to purchase one share of this stock todav?

Answer 1

PO = DO*(1+g)/(Ke-g) 0.95*(1+0.026)/(0.13-0.026) $ 9.37 DO Rate of Return Recent Dividend Growth rate Stock price Today $ 9.37

Answer 2

ANSWER :

Given :

D0 = 0.95 ($)

g = 2.6 % =  0.026

r = 13% = 0.13

Now, as per DDM at constant growth :

Current value off the stock

= D0 (1 + g) / (r - g)

= 0.95*(1 + 0.026)/ (0.13 - 0.026)

=  9.37 ($)

Maximum that can be paid per share = 9.37 ($) (ANSWER)