The Row Boat has paid annual dividends of $.48, $0.60, and $0.62 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its
Business has leveled off and sales are expected to remain relatively constant. Given the lack of
Future growth, you will only buy this stock if you can earn at least a 14% rate of return. What is the
Maximum amount you are willing to pay for one share of this stock today?

Question

Quizplus · Accepted Answer

To calculate the maximum amount we are willing to pay for one share of this stock today, we use the dividend discount model:

P = D/r

where P is the maximum price we are willing to pay, D is the expected dividend per share, and r is the required rate of return (in decimal form).

Since the company predicts that it will maintain a constant dividend, the expected dividend per share is equal to the most recent dividend, which is $0.62.

We are given that we require a 14% rate of return, so we substitute 0.14 for r:

P = $0.62/0.14 = $4.43

Therefore, the maximum amount we are willing to pay for one share of this stock today is $4.43, which corresponds to choice C.

The Row Boat Has Paid Annual Dividends of