You have decided that you would like to own some shares of GH Corp. 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 stock if the company pays a constant $3.50 annual dividend per share?
A) $26.04
B) $29.17
C) $32.67
D) $34.29
E) $36.59

Question

Quizplus · Accepted Answer

To calculate the maximum price you are willing to pay for a share of GH Corp., you can use the dividend discount model (DDM) formula:

Price per share = Dividend per share / (Required rate of return - Dividend growth rate)

Since the dividend is constant and the problem does not provide a dividend growth rate, we can assume that the growth rate is 0 (i.e. the dividend stays constant forever).

Plugging in the numbers:

Price per share = $3.50 / (0.12 - 0) = $29.17

Therefore, the maximum price you are willing to pay is $29.17 per share, which corresponds to choice B.

You Have Decided That You Would Like to Own Some