1. The last dividend on Spirex Corporation\'s common stock was $3.75, and the ex
ID: 2705881 • Letter: 1
Question
1. The last dividend on Spirex Corporation's common stock was $3.75, and the expected growth rate is 8 percent. If you require a rate of return of 15 percent, what is the highest price you should be willing to pay for this stock?
a.
$44.00
b.
$38.50
c.
$40.00
d.
$45.69
e.
$57.86
a.
$44.00
b.
$38.50
c.
$40.00
d.
$45.69
e.
$57.86
The last dividend on Spirex Corporation's common stock was $3.75, and the expected growth rate is 8 percent. If you require a rate of return of 15 percent, what is the highest price you should be willing to pay for this stock?Explanation / Answer
Hi,
Please find the answer as follows:
Price to be Paid for the Stock = D1/(ke-g)
D1 = 3.75*(1+.08) = 4.05
ke = 15%
g = 8%
Price to be Paid for the Stock = 4.05/(.15-.08) = 57.86
Option E (57.86) is the correct answer.
Thanks.
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