Question

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?

Answer 1

$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