Estimate the maximum price

Reference no: EM1360077

Gentry Can Company's latest annual dividend of $1.25 a share was paid yesterday and maintained its historic 7 percent annual rate of growth. You plan to purchase the stock today because you believe that the dividend growth rate will increase to 8 percent for the next three years and the selling price of the stock will be $40 per share at the end of that time.

a) How much should you be willing to pay for the GCC stock if you require a 12 percent return?

b) What is the maximum price you should be willing to pay for the GCC stock if you believe that the 8 percent growth rate can be maintained indefinitely and you require a 12 percent return?

c) If the 8 percent rate of growth is achieved, what will the price be at the end of Year 3, assuming the conditions in Part b?

Reference no: EM1360077

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