5. The Clark Group pays an annual dividend of $5.80 per share. The economy is to

Question

5. The Clark Group pays an annual dividend of $5.80 per share. The economy is tough but Clark promises to continue maintaining this level of dividend every year for the time being. How much are you willing to pay for one share of this stock is you want to earn a 14.5% annual return?

6. Miller Cooper just paid a $4.25 annual dividend with the stated intention of increasing its dividend by 3% annually. You would like to purchase stock in this firm but realize that you will not have the funds to do so for another 4 years. If you require a 15% rate of return, how much will you be willing to pay per share for the stock when you can afford to make this investment?

Explanation / Answer

5. This is an example of constant annual dividend. The price to pay is given by D/ Ke

D = 5.80

Ke = 0.145

So price = 5.80/0.145 = $40

The price you willing to pay for one share of this stock is $40

6. Here we use the dividend distribution model where price = D1/(ke-g)

D0 = 4.25

D1 = 4.25*1.03 = 4.3775

Ke = 0.15

g = 0.03

So Price = 4.3775/(0.15-0.03) = $36.48

The price you willing to pay for one share of this stock is is $36.48

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