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What would you pay for a stock expected to pay a $2.50 dividend in one year if the expected dividend growth rate is zero and you require a 10% return on your investment?
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8 votes
8 votes
What would you pay for a stock expected to pay a $2.50 dividend in one year if the expected dividend growth rate is zero and you require a 10% return on your investment?

User Nayburz
by
3.2k points

1 Answer

14 votes
14 votes

Answer:

$25

Step-by-step explanation:

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

$2.5 / (0.1 - 0) = $25

User Nilinswap
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2.7k points
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