Question

A stock just paid an annual dividend of $2.00, which is expected to remain constant indefinitely. The market return is 14%. The estimated selling price of the stock is:

a. $1.76
b. $14.29
c. $10.43
d. none of the above

Answer 1

Using the dividend discount model with a constant dividend of $2.00 and a market rate of return of 14%, the estimated selling price of the stock is $14.29.

Step-by-step explanation:

The question involves calculating the estimated selling price of a stock based on its expected constant dividends and the given market rate of return. We can do this by using the dividend discount model (DDM) which, in the case of constant dividends, simplifies to the formula: Price = Dividend per share / Market Rate of Return. In this scenario, a stock that just paid an annual dividend of $2.00 and is expected to remain constant indefinitely with a market return of 14% can be calculated as:

Price = $2.00 / 0.14 = $14.29.

So, the estimated selling price of the stock is $14.29, which corresponds to option (b).