You have decided to purchase shares of GHC but need an expected 12 percent rate of return to compensate for the perceived risk of such ownership.What is the maximum price you should pay per share if the company pays a constant $2.70 annual dividend per share?
A)$23.04
B)$22.50
C)$32.67
D)$34.29
E)$21.59

Question

Quizplus · Accepted Answer

To find the maximum price to pay per share, we need to use the constant growth model formula:

Price per share = Dividend per share / (Required rate of return - Dividend growth rate)

The dividend growth rate can be calculated as the increase in the annual dividend divided by an initial dividend. Here, the annual dividend is $2.70 and there is no information given about any increase in the dividend, so we assume the dividend growth rate is zero.

Price per share = $2.70 / (0.12 - 0) = $22.50

Therefore, the maximum price to pay per share is $22.50, so the best choice is B.

You Have Decided to Purchase Shares of GHC but Need