3. The common stock of Company A pays an annual dividend of $1.65 a share. The c

Question

3. The common stock of Company A pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return?

4. Company B just paid an annual dividend of $0.95 per share. The company announced that future dividends will be increasing by 2.6 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one share of this stock today?

Explanation / Answer

2. The common stock of Company A pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return.

Price= Dividend/return

Price= 1.65/0.12 = $13.75

2. Company B just paid an annual dividend of $0.95 per share. The company announced that future dividends will be increasing by 2.6 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one share of this stock today?

Price of the share today = 0.95[(1+0.026)/(0.13 - 0.026)]

Price of the share today = 9.37

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