Johnson Bro's paid an annual dividend of $1.05 per share last month. Today the company announced...
Johnson Bro's paid an annual dividend of $1.05 per share last month. Today the company announced that future dividends will be increasing by 2.4 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one of this stock today?
Homework Answers
ANSWER :
Given :
D0 = 1.05 ($)
g = 2.4 % = 0.024
r 13% = 0.13
Now, as per DDM at constant growth :
Current value off the stock
= D0 (1 + g) / (r - g)
= 1.05*(1 + 0.024)/ (0.13 - 0.024)
= 10.14 ($)
Maximum that can be paid per share = 10.14 ($) (ANSWER)
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