Martin’s Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share ove

Question

Martin’s Yachts has paid annual dividends of $1.40, $1.75, and $2.00 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 15% rate of return. Based on the dividend discount model, what is the maximum amount you should be willing to pay to buy one share today?

Explanation / Answer

Maximum amount to pay for dividend wil be = expected dividend per share/ expected rate of return

                                                             = $ 2.00/15*100

                                                             = $ 13.33

As the company will pay a constant dividend, it is assumed that it will pay dividend equal to the last year dividend paid per share

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