Answer:
Explanation:
Next year's dividend (D1) = 1.48
Perpetual growth rate (g) =2.5% or 0.025 as a decimal
Rate of return or discount rate = 12% or 0.12 as a decimal
Since the dividends will be growing at a constant rate with no definite time period, it means that it will grow at that rate forever.
Use present value of growing perpetuity formula to calculate the price of this stock;
Price = D1 /(r-g)
Price = 1.48 / (0.12 - 0.025)
= 1.48/ 0.095
= 15.5789
Therefore the maximum amount you should pay is $15.58
