You are evaluating the purchase of Somners Resources' ordinary shares that just paid a dividend of $1.80.You expect the dividend to grow at a rate of 12%,indefinitely.You estimate that a required rate of return of 17.5% will be adequate compensation for this investment.Assuming that your analysis is correct,what is the most that you would be willing to pay for the ordinary shares if you were to purchase it today? Round to the nearest $.01.

Question

Quizplus · Accepted Answer

The correct answer is A because the most that you would be willing to pay for the ordinary shares if you were to purchase it today is $36.65. This is calculated by dividing the expected dividend by the difference between the required rate of return and the expected dividend growth rate. In this case, the expected dividend is $1.80, the required rate of return is 17.5%, and the expected dividend growth rate is 12%. Therefore, the most that you would be willing to pay for the ordinary shares is $36.65.

You Are Evaluating the Purchase of Somners Resources' Ordinary Shares