Question

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $3.10 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 return of 14.50 percent on your equity investments?

a) $1140 b) $21.38 c) $44 95 d) $1760

Answer 1

The maximum that one should be willing to pay for this stock today is $21.38

Step-by-step explanation:

The constant dividend paying company is the one whose dividend growth remains zero or unchanged. The zero growth model of the DDM is used to calculate the price or value of stock today of such a stock. This kind of stock is just like a perpetuity as it pays a fixed amount after fixed intervals of time forever.

The formula for price of such a stock or zero growth model is:

Price = Dividend / r

Price = 3.1 / 0.145

Price = $21.379 rounded off to $21.38