You would like to own some shares of the Clean Oil Company but need a 18% rate of return to...

Question:

You would like to own some shares of the Clean Oil Company but need a 18% 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 $3.00 annual dividend per share?

Cash Dividend:

The cash dividend is the most common type of dividend in which the company issued cash to its shareholders. A cash dividend is usually from the net earnings of the company's operation over a certain period.

Answer and Explanation:

The maximum purchase price of the stock can be calculated using the perpetuity method, in which in this case, it assumes that the market price of the stocks remain constant over period.

{eq}\begin{align*} Stock~price&=\dfrac{Stock~price}{Required~return}\\ &=\frac{3.00}{.18}\\ &=16.67 \end{align*} {/eq}

The maximum purchase of the stock to meet the required return of 18% is $16.67


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Cash Dividends & Dividend Payment

from Finance 101: Principles of Finance

Chapter 16 / Lesson 1
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