You have decided that you would like to own some shares of GH Corp. but need an expected 12% rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend per share to buy GH stock if the company pays a constant $3.50 annual dividend per share?

Question

Rishi Fitzgerald

Business

25 October, 13:47

You have decided that you would like to own some shares of GH Corp. but need an expected 12% rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend per share to buy GH stock if the company pays a constant $3.50 annual dividend per share?

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Answers (1)

Know the Answer?

Amaya Gonzalez · Answer 1

Share price = 29.16

Explanation:

Given:

Dividend paid = $3.50

Required rate of return = 12% = 12/100 = 0.12

Growth rate = 0%

Find:

Share price = ?

Computation:

⇒ Share price = Dividend paid / [Required rate of return - Growth rate ]

⇒ Share price = $3.5 / (0.12-0)

⇒ Share price = 29.16