Rosita's announced that its next annual dividend will be $1.65 a share and all future dividends will increase by 2.5 percent annually.What is the maximum amount you should pay to purchase a share of this stock if you require a rate of return of 12 percent?

Question

Quizplus · Accepted Answer

The maximum price to pay for the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the next dividend ($1.65), r is the required rate of return (12% or 0.12), and g is the growth rate (2.5% or 0.025). Plugging in the values: P = 1.65 / (0.12 - 0.025) = 1.65 / 0.095 = $17.37.

Rosita's Announced That Its Next Annual Dividend Will Be $1