Final answer:
An investor who requires a 14 percent rate of return would value Zero-Sum's stock at $10 per share, calculated using the Dividend Discount Model with a $1.40 annual dividend and no growth.
Step-by-step explanation:
Zero-Sum Enterprise pays an annual dividend of $1.40 per share, with no expected growth in this dividend or the company's earnings. To determine the value of a stock, the Dividend Discount Model (DDM) can be used for a company with constant dividends.
According to the DDM, the value of the stock (P) is the dividend (D) divided by the required rate of return (r) minus the growth rate (g), which in this case is 0 as there is no growth. Therefore, the Formula is:
P = D / r
By substituting the given values, we find:
P = $1.40 / 0.14 = $10
So, an investor requiring a 14 percent rate of return would value Zero-Sum's stock at $10 per share.
The complete question is: Zero-Sum Enterprise pays an annual dividend of $1.40 per share and neither earnings nor dividends are expected to grow in the future. What is the value of Zero-Sum's stock to an investor who requires a 14 percent rate of return? is: