You are considering the purchase of ordinary shares that just paid a dividend of $6.50 per share.Security analysts agree with top management in projecting steady growth of 12% in dividends and earnings over the foreseeable future.Your required rate of return for shares of this type is 18%.How much should you expect to pay for this share?

Question

Quizplus · Accepted Answer

Using the constant growth model, we can calculate the price of the share as follows:

Price = Dividend/(Required rate of return - Growth rate)

Price = $6.50/(0.18-0.12) = $108.33

Therefore, the answer is D, $121, which is the closest to $108.33.

You Are Considering the Purchase of Ordinary Shares That Just