Question

Sessler manufacturers made two announcements concerning its common stock today. first, the company announced that the next annual dividend will be $1.55 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?

Answer 1

To solve this problem, let us recall that the formula for calculating the required present amount is:

P = D / (ROR – ROI)

where,

D = annual dividend per share = $1.55

ROR = rate of return = 0.16

ROI = rate of increase = 0.015

Calculating for the required amount, P:

P = $1.55 / (0.16 – 0.015)

P = $10.69

Therefore, you should pay around $10.70 to get a 16% rate of return.