Question

Michelak's Maritime Industries has relatively stable earnings and pays an annual dividend of $1.50 per share. This dividend has remained constant over the past few years and is expected to remain constant for some time to come. Using the dividend valuation model for a perpetuity, if you want to earn 8% on an investment in the common stock of Michelak's, how much should you pay to purchase a share of stock?

Answer 1

The amount to be paid is $18.75 if the person wants to earn an 8%

Step-by-step explanation:

To calculate the stock price, and considering the valuation model, we have to consider the following formula

Annual dividend/Required return

= $1.50/8%

= $18.75