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Determining Price and rate of return of stock

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1) Megan made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Megan's stock if your goal is to earn a 10% rate of return?

2) The common Stock of Eddies Engines, Inc. Sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Eddie's has established a pattern of incrasing it dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?

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Solution Summary

Solution describes the steps in determining price and rate of return for stocks in case of constantly increasing dividends.

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1) Megan made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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