Question

Dave's Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12% return on your equity investments?

Answer 1

$16.67

Step-by-step explanation:

The formula for calculating the price of the stock in order to know how much we are willing to pay for that stock is:

P = Dividend / (rate - Growth).

Now since there is no growth in dividend as mentioned in the question. The formula would now be:

P = Dividend / rate

Price = $2 / 0.12

Price = $16.67.

Hope this clears the concept. Cheers.