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You have decided you would like to own some shares of the Dirty Coal Company but need a 13% rate...

Question:

You have decided you would like to own some shares of the Dirty Coal Company but need a 13% rate of return to compensate for the perceived risk of such ownership.

What is the maximum you are willing to spend per share to buy this stock if the company pays a constant $2.00 annual dividend per share?

Dividend:

Dividend refers to the cash or stock issued by the corporations to its shareholders in an accounting period. In most case, a company which has a sustainable positive cash flow such as a utility company, always pay a dividend to its shareholders each period.

Answer and Explanation:

The following equation will be used to calculate the maximum price of the stock with 13% required return.

{eq}\begin{align*} Stock~price&=\dfrac{Dividend}{Required~return}\\ &=\frac{2.00}{.13}\\ &=15.38 \end{align*} {/eq}

The maximum purchased price of the stock to achieved the required rate of return of 13% is $15.38


Learn more about this topic:

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Cash Dividends & Dividend Payment

from Finance 101: Principles of Finance

Chapter 16 / Lesson 1
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