You are considering the purchase of BIG Company’s common stock. You anticipate that the company will pay dividends of RM2.00 per share next year and RM2.25 the following year. You anticipate that after the second year, the dividend is going to grow at a constant rate of 5 percent per year indefinitely. However, you plan to hold the stock for only four years, and you believe that you can sell the stock for RM20.50 per share at that time. If your required rate of return is 12 percent, what is the maximum price that you would pay for a share of BIG Company stock?
A company is preparing to pay its first dividend. It plans to pay RM1.00, RM2.50 and RM5.00 a share over the next three years respectively. After that, the annual dividend will be fixed at RM1.25 per share for the next 10 years before it levels off at a constant growth rate of 3 percent indefinitely. The current market price of the stock is RM22. If you demand a 10 percent rate of return, will you purchase this company’s common stock?
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