Question

Cortez, Inc., paid a dividend of $2.40 last year. The company's management does not expect to increase its dividend in the foreseeable future. If the required rate of return is 16.0 percent, what is the current value of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.) A)$13.45 B)$11.12 C)$9.87 D)$15.00

Answer 1

Using the dividend discount model for a perpetuity, the current value of Cortez, Inc.'s stock, with a steady dividend of $2.40 and a required rate of return of 16.0%, is $15.00.

Step-by-step explanation:

To determine the current value of a stock when a company, like Cortez, Inc., has paid a dividend of $2.40 last year and does not expect to increase it in the foreseeable future, we use the dividend discount model for a perpetuity since the dividend is expected to remain constant. This model suggests that the price of the stock is equal to the dividend per share divided by the required rate of return. Thus, the calculation would be:

Price = Dividend / Required Rate of Return
Price = $2.40 / 0.16
Price = $15.00

Therefore, the current value of the stock is $15.00.