Question

What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The required rate of return is 12.5 percent.

a. $11.24
b. $9.52
c. $10.88
d. $10.64
e. $11.47

Answer 1

$10.88

Step-by-step explanation:

Calculation to determine What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities

Using this formula

Maximum payment for common stock=Dividend/Required rate of return

Let plug in the formula

Maximum payment for common stock=$1.36/.125 Maximum payment for common stock= $10.88

Therefore What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities is $10.88