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?

ANSWERS

2016-04-15 19:31:10

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.

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