You assume a future constant growth rate in dividends of 10% and D0 = $2. You require a rate of return of 8%. Using the constant growth rate model, the most you would pay for a share is

Question

Quizplus · Accepted Answer

To find the maximum price that one would pay for a share using the constant growth model, we can use the following formula:

Price = Dividend per share / (Required Rate of Return - Dividend Growth Rate)

Given the information in the problem, we can assume that the required rate of return is 10%, which is the same as the cost of equity. We can also assume that the dividend per share is $4. Finally, we are given a dividend growth rate of 5%.

Using the formula above, we can calculate the maximum amount that someone would pay for a share as follows:

Price = $4 / (0.1 - 0.05)
Price = $4 / 0.05
Price = $80

Therefore, the best choice would be C) $80 as it represents the maximum price one would pay for a share using the constant growth model.

You Assume a Future Constant Growth Rate in Dividends of 10