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?

Question

Quizplus · Accepted Answer

To find the maximum price (P) we can pay for the equity, we can use the dividend discount model: 
P = Dividend / (required rate of return - growth rate) 
Since the company pays a constant dividend, the growth rate is zero. Thus, 
P = 3.50 / (0.12 - 0) = 29.17 
Therefore, the maximum price we can pay per share is €29.17. Option B is the closest to this value.

You Have Decided That You Would Like to Own Some