Question 2 Unsaved Sessler Manufacturers made two announceme

Question 2 Unsaved Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $2.15 a share. Secondly, all dividends after that will increase by 1.5 percent for the foreseeable future. What is the maximum amount you should pay to purchase a share of this stock today if you require a 16 percent rate of return? Show all work.

Solution

as per dividend growth model:

price of the stock= next dividend / (required return - growth rate)

=> $2.15 / (0.16 - 0.015)

=>$2.15 / 0.145

=>$14.83.

The maximum amount that can be paid = $14.83.