Question

What should be the price of a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

Answer 1

$43.75

Step-by-step explanation:

Dividend discount model with zero growth assumes that the Company shall continue to pay the same amount of dividend in infinity. The formula for calculating price of such stock is

Price = Annual Dividend / Discount rate

Price = $3.5 / 8%

Price = $43.75 / per share