Question

Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, calculate the stock price today. (The required rate of return is 10%.)

Answer 1

The price of the stock is $100.

Step-by-step explanation:

First we need to find the dividend per share.

We find that out by dividing the total dividend payment by the number of shares outstanding.

1000/100= 10

We now know that the dividend per share is $10. Because the firm expects to mantain this dividend forever and there are no chances of dividend growth we can use the formula for a perpetuity to find the price of the stock.

Price of stock = Dividend/Required rate of return

Price = 10/0.1=$100