Jefferson's recently paid an annual dividend of $1.31 per share. The dividend is expected to decrease by 4% each year. How much should you pay for this stock today if your required return is 16%?

Question

Damaris Wong

Business

31 December, 14:28

Jefferson's recently paid an annual dividend of $1.31 per share. The dividend is expected to decrease by 4% each year. How much should you pay for this stock today if your required return is 16%?

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Answers (1)

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Randall Diaz · Answer 1

I should pay $10.92 per share for the stock today as shown below

Explanation:

The maximum price a rational investor could pay for a share is given by the formula:

Po=Div/rate of return-growth rate

Po is the price to paid

Rate of return here is 16%, which is similar to return on equity

The growth rate of the share of the dividend is 4%

Po=$1.31 / (0.16-0.04)

Po = $10.92

The price has factored in both the dividend yield and gains yield of the share.

dividend yield is the return earned by share through dividends

gains yield is another return earned by share through appreciation in its price in the market place-stock exchange

Total return on return on share is the sum of both.