Martin's Yachts has paid annual dividends of $1.40,$1.75,and $2.00 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 15% rate of return. What is the maximum amount you are willing to pay to buy one share today?

Question

Quizplus · Accepted Answer

To calculate the maximum amount to pay for one share today, we need to use the dividend discount model:

P = D / r

where P is the price, D is the dividend, and r is the required rate of return.

Since the dividend is expected to remain constant, we can use the last dividend payment of $2.00 as D. The required rate of return is given as 15%.

P = $2.00 / 0.15 = $13.33

Therefore, the maximum amount you should be willing to pay to buy one share today is $13.33. Choice B is the best option.

Martin's Yachts Has Paid Annual Dividends of $1