Dietterich Electronics wants its shareholders to earn a return of 9%
on their investment in the company. At what price would the stock need to be priced today if Dietterich Electronics had a
a. $0.40constant annual dividend forever?
b. $1.20constant annual dividend forever?
c. $1.90 constant annual dividend forever?
d. $2.90constant annual dividend forever?
Calculating the stock price today, also known as the present value of a perpetuity, requires understanding the concept of perpetuities and discounting future cash flows to their present value. In this case, Dietterich Electronics wants its shareholders to earn a return of 9%. We will calculate the stock price for different constant annual dividend scenarios:
a. $0.40 Constant Annual Dividend Forever:
To find the stock price for a constant annual dividend of $0.40 forever, we can use the formula for the present value of a perpetuity:
Stock Price = Dividend / Discount Rate
Stock Price = $0.40 / 0.09
Stock Price = $4.44
Therefore, if Dietterich Electronics wants to provide a 9% return to its shareholders with a constant annual dividend of $0.40, the stock should be priced at $4.44 today.
b. $1.20 Constant Annual Dividend Forever:
Using the same formula:
Stock Price = $1.20 / 0.09
Stock Price = $13.33
To achieve a 9% return for shareholders with a constant annual dividend of $1.20, the stock should be priced at $13.33 today.
c. $1.90 Constant Annual Dividend Forever:
Once again, applying the formula:
Stock Price = $1.90 / 0.09
Stock Price = $21.11
For a constant annual dividend of $1.90, Dietterich Electronics should have a stock price of $21.11 today to meet the 9% return requirement for shareholders.
d. $2.90 Constant Annual Dividend Forever:
Lastly:
Stock Price = $2.90 / 0.09
Stock Price = $32.22
To provide a 9% return to shareholders with a constant annual dividend of $2.90, the stock should be priced at $32.22 today.
In conclusion, the stock price today for Dietterich Electronics would vary depending on the constant annual dividend it intends to pay. For constant dividends of $0.40, $1.20, $1.90, and $2.90, the respective stock prices today would be $4.44, $13.33, $21.11, and $32.22 to meet the 9% return requirement for shareholders. It’s essential for the company to carefully consider its dividend policy to align with its investors’ return expectations.
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