Question

Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?

Answer 1

Answer:

Maximum amount you should pay to purchase a share of Angelina's stock will be calculated in this way-

From Constant growth model:

Formula: P₀ = D1 / (r-g)

Where:

P₀ = Price of stock

D1 = Next dividend per share

r = Rate of return

g = Growth

Given in the question:

D1 = $2.16, g = 4%, r = 10%, P₀ = ?

Putting all the given values in the above formula, we get:

P₀ = 2.16 / (.10-.04)

Price of the stock = $36

Note: D1 that is next annual dividend is given so we did not multiply it with 1+g. If current dividend would have been given then we would have multiplied 2.16 * (1+.04)