Johnson Enterprises intends to make a dividend payment of $3.25 per share next year. After this dividend payment, the firm is commited to raise its dividend by 5.1 percent per year, forever. Assuming you require a return of 15 percent on this investment, how much would you be willing to pay for this stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

Question

Business

Emmett Norris

31 December, 10:00

Johnson Enterprises intends to make a dividend payment of $3.25 per share next year. After this dividend payment, the firm is commited to raise its dividend by 5.1 percent per year, forever. Assuming you require a return of 15 percent on this investment, how much would you be willing to pay for this stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

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Answers (1)

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James · Answer 1

I would be willing to pay $ 32.83 for each share of Johnson Enterprises

Explanation:

The price per share = next year dividend/required rate of return-growth rate

next year dividend is $3.25

required rate of return is 15%

dividend growth rate in perpetuity is 5.1%

share price=$3.25 / (15%-5.1%)

share price = $3.25/9.9%

share price=$3.25/0.099

share price=$ 32.83

The share can be sold today for $ 32.83, which is the present value of dividends payable in perpetuity (forever)