Question

one of the options is delta airlines. they have paid an annual dividend of $4.06 for the past 25 years and we expect them to continue this indefinitely. assuming the market requires a(n) 12.1% return from delta, what is the value of a share of stock? (hint: round intermediate calculations and answer to 2 decimal places)

Answer 1

The value of a share of Delta Airlines stock, which pays a perpetual annual dividend of $4.06 and has a required return of 12.1%, is calculated as $33.55.

Step-by-step explanation:

The student's question revolves around determining the value of a share of stock for Delta Airlines, which has paid a consistent annual dividend and is expected to continue doing so indefinitely. To calculate the value of one share of stock given a perpetual dividend and a required rate of return, we can use the formula for valuing a perpetuity: the dividend amount divided by the required rate of return. The formula is Stock Value = Dividend / Required Return. Therefore, for Delta Airlines:

Stock Value = $4.06 / 0.121 = $33.55

Thus, using a required return of 12.1%, a share of Delta Airlines stock would be valued at $33.55.