You have decided you would like to own some shares of the Clean Coal Company but need a 16% 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 this stock if the company pays a constant $1.75 annual
Dividend per share?

Question

Quizplus · Accepted Answer

To calculate the maximum price per share, we can use the dividend discount model:
maximum price per share = dividend per share / (required rate of return - dividend growth rate)
Since the problem states that the dividend is constant, the dividend growth rate is 0. Therefore, we can simplify the formula:
maximum price per share = dividend per share / required rate of return
maximum price per share = $1.75 / 0.16
maximum price per share = $10.94
Therefore, the maximum price per share that you should be willing to spend is $10.94. The answer is B.

You Have Decided You Would Like to Own Some Shares