8 10 When dividend payments are constant and are made for the foreseeable future

Question

8 10

When dividend payments are constant and are made for the foreseeable future, the cash flow can be considered as perpetuity. Hence, the value of the stock = $2.50/0.12 = $20.83. The Stagnant Growth Corporation has paid a constant dividend of $2.50 per year for the past 3 years and is expected to continue paying the same dividend per share for the foreseeable future. If the required rate of return on its common stock is 12%, the most an investor should pay per share is. (Round to two decimal places.) $2.50 $7.50 $40.80 $20.83

Explanation / Answer

Dividend Payment per year in perpetuity= $                    2.50 Required Return on Common stock = 12% So Price of Share =2.5/12% = $                  20.83 So the maximum amount an investor should pay   per share is $20.83

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