Question

Mark Harris is interested in buying the stock of First National Bank. While the bank's management expects no growth in the near future, Mark is attracted by the dividend income. Last year the bank paid a dividend of $6.65. If Mark requires a return of 19 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank's stock? (Round answer to 2 decimal places, e.g. 15.25.)

Answer 1

To calculate the maximum price Mark should be willing to pay for a share of the bank's stock, we use the dividend discount model (DDM). The maximum price is $35.

Step-by-step explanation:

To calculate the maximum price Mark should be willing to pay for a share of the bank's stock, we need to use the dividend discount model (DDM).

1. First, we determine the expected dividend income per share. In this case, it is $6.65.
2. Next, we calculate the dividend growth rate. Since the bank's management expects no growth, the dividend growth rate is 0%.
3. Finally, using the required return rate of 19%, we can determine the present value of the dividend income. This can be done by dividing the expected dividend by the required return rate: $6.65 / 0.19 = $35.

Therefore, the maximum price Mark should be willing to pay for a share of the bank's stock is $35.