Martin\'s Yachts has paid annual dividends of $1.70, $1.8, and $2.1 a share over

Q: Martin's Yachts has paid annual dividends of $1.70, $1.8, and $2.1 a share over

Hi, Please find the detailed answer as follows: Since, we have been provided with the dividends for past few years, but no growth rate, we will use last year's dividend to calculate the stock price. Stock Price = Dividend/Interest Rate (It is because, the dividend is expected to be in perpetuity now, indicating it will continue to occur) Stock Price = 2.10/10% = $21 Option D($21) is the correct answer. Thanks.

ID: 2641785 • Letter: M

Question

Martin's Yachts has paid annual dividends of $1.70, $1.8, and $2.1 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least a 10% rate of return. What is the maximum amount you are willing to pay to buy one share today? :

a. $10.00

b. $17.00

c. $18.00

d. $21.00

e. $23.10

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Since, we have been provided with the dividends for past few years, but no growth rate, we will use last year's dividend to calculate the stock price.

Stock Price = Dividend/Interest Rate (It is because, the dividend is expected to be in perpetuity now, indicating it will continue to occur)

Stock Price = 2.10/10% = $21

Option D($21) is the correct answer.

Thanks.

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Martin\'s Yachts has paid annual dividends of $1.70, $1.8, and $2.1 a share over

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