Question

What price would an investor requiring a 6% return pay for a

stock which just declared a dividend of $4.00 if the expected
dividend and earnings growth rate was estimated at 0%?

Answer 1

The investor requiring a 6% return would pay approximately $66.67 for the stock.

Step-by-step explanation:

The price an investor is willing to pay for a stock is influenced by the expected return and dividend. In this scenario, with a dividend of $4.00 and an expected growth rate of 0%, the Gordon Growth Model can be utilized to find the stock's intrinsic value. The formula for the Gordon Growth Model is Price = Dividend / (Required Rate of Return - Growth Rate). Given the 6% required return and 0% growth rate, the calculation would be Price = $4 / (0.06 - 0) = $66.67.

The Gordon Growth Model is a tool used to estimate the intrinsic value of a stock based on its dividends, expected growth rate, and investor's required rate of return. When growth is estimated to be zero, the formula simplifies to Price = Dividend / Required Rate of Return. Here, the stock's value is solely based on the dividend payment and the investor's desired return. In this case, the investor requiring a 6% return would be willing to pay around $66.67 for the stock, considering the $4.00 dividend and no anticipated growth in dividends or earnings.