Aussie Investors Pty Ltd is considering investing in a new biotech company.The biotech company has indicated that the first dividend payment will be at the end of year four.This maiden dividend will be $5.00 per share and is forecast to grow at 8 per cent per year for the foreseeable future.Aussie Investors requires a rate of return of 25 per cent on this risky investment.What is the maximum price that Aussie Investors will pay for this share?

Question

Quizplus · Accepted Answer

To find the maximum price that Aussie Investors will pay for this share, we need to use the dividend discount model:

P = D / (r - g)

where P is the maximum price, D is the first dividend payment, r is the required rate of return, and g is the growth rate of dividends.

Substituting the given values, we get:

P = 5 / (0.25 - 0.08) = $15.06

Therefore, the maximum price that Aussie Investors will pay for this share is D)$15.06.

Aussie Investors Pty Ltd Is Considering Investing in a New