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 hased off and sales are expected to remain relatively constant.Given the lack of future growth, you will only buy this equity if you can earn at least a 15% rate of return.What is the maximum amount you are willing to pay to buy one share today?

Question

Quizplus · Accepted Answer

Given the lack of growth, the dividend is expected to remain constant at the last paid dividend of €2.00. Using the dividend discount model for a perpetuity, the price of the stock is calculated as Dividend / Required Rate of Return = €2.00 / 0.15 = €13.33.

Martin's Yachts Has Paid Annual Dividends of €1