Majestic Homes share traditionally provides an 8% rate of return.The company just paid a €2 a year dividend which is expected to increase by 5% per year.If you are planning on buying 1,000 shares next year, how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase?

Question

Quizplus · Accepted Answer

To calculate the expected price per share, we can use the dividend discount model:

Expected price per share = (next year's dividend / market rate of return - dividend growth rate)

Next year's dividend = current dividend * (1 + dividend growth rate) 
= €2 * (1 + 0.05) 
= €2.10

Expected price per share = (€2.10 / 0.09 - 0.05) 
= €55.13

Therefore, we should expect to pay €55.13 per share.

Majestic Homes Share Traditionally Provides an 8% Rate of Return