To determine the value for the dividend that is consistent with the market value, we can use the dividend discount model (DDM) formula. The DDM formula states that the value of a stock is equal to the present value of its future dividends.
The formula for calculating the value of a stock using the DDM is as follows:
Stock Value = Dividend / (Required Rate of Return - Dividend Growth Rate)
In this case, we are given that the company has 2 million shares outstanding and the PE ratio is 20, which means the earnings per share (EPS) is €25. Since the growth rate is 0, the dividend growth rate is also 0.
Let's calculate the value of the dividend using the DDM formula:
Required Rate of Return = 10% or 0.10
Dividend = EPS = €25
Stock Value = €25 / (0.10 - 0)
Stock Value = €25 / 0.10
Stock Value = €250
Therefore, in order to establish a fixed dividend payment consistent with the market value, Mr. Pallete should set the dividend at €250 per share.