The last dividend paid on Spirex Corporation's common stock was $3.00 per share, and the expected...

The last dividend paid on Spirex Corporation's common stock was $3.00 per share, and the expected constant growth rate of dividends is 6.00 percent. If you require a rate of return of 16.80 percent on this stock, what is the most you should pay per share?

Expert Solution



CALCUALTION OF D1

Last Dividend (D0)				$ 3.00
Next Dividend (D1) = (D0 X Groth) = ($ 3 X 1.06) =				$ 3.18
Constant Gowth =		6.0%



CALCULATION OF THE PRESENT VALUE OF THE STOCK

Formula	P0 = D1 / ( Ke - g )
Ke = Cost of Equity = Required return = 16.80% or =				0.168
g = Growth rate = 6% = or =				0.06
P0 = Present Value of the stock


P0 =	D1	"/" By (	(Ke	(-)	Growth )
P0 =	$ 3.18	"/" By (	0.168	(-)	0.06	)
P0 =	$ 3.18	"/" By	0.108
P0 =	$ 29.44


Answer = We can pay maximum amount of this share = $ 29.44

jeff jeffy answered 3 years ago

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