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 hased off and sales are expected to remain relatively constant.Given the lack of future growth,you will only buy this equity 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

In order to calculate the maximum amount you are willing to pay to buy one share today, you need to use the dividend discount model, which is: D1/(r-g), where D1 is the expected dividend for the next period, r is the required rate of return and g is the expected growth rate. Since the company predicts no future growth, g is equal to 0. Using the given dividend values, the expected dividend is €2.00 (assuming it remains constant). The required rate of return is 15%. Plugging these values into the dividend discount model, we get: €2.00/(0.15-0) = €13.33. Therefore, the maximum amount you are willing to pay to buy one share today is €13.33.

Martin's Yachts Has Paid Annual Dividends of €1