You have decided that you would like to own some shares of GH NV but need an expected 12% rate of return to compensate for the perceived risk of such ownership.What is the maximum you are willing to spend per share to buy GH equity if the company pays a constant €3.50 annual dividend per share?
A)€26.04
B)€29.17
C)€32.67
D)€34.29
E)€36.59

Question

Quizplus · Accepted Answer

To calculate the maximum price per share that an investor is willing to spend, we can use the constant growth model: 
expected rate of return = ( dividend yield + capital gains yield ) 
12% = ( 3.5 / P ) + g 
Assuming a constant dividend growth rate (g) of 3%, we can solve for P: 
P = 3.5 / ( 0.12 - 0.03 ) 
P = 3.5 / ( 0.09 ) 
P = €38.89 
Therefore, the maximum price an investor is willing to spend is €38.89 per share. Since this is higher than all the answer choices, we need to choose the closest answer choice that is lower, which is B: €29.17.

You Have Decided That You Would Like to Own Some