Question

Zero growth: Ron Santana is interested in buying the stock of First National Bank. While the bank expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $5.65. If Ron requires a return of 14 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank's stock?

Answer 1

The answer is $40.35.

Step-by-step explanation:

If Ron requires a return of 14 percent on such stocks, the maximum price he should be willing to pay for a share of the bank's stock with no expected growth in the near future:

Price of Stock = Expected Dividend x (1 + Growth Rate) / Expected Rate of Return = $5.65 x (1 + 0%) / 0.14% = $40.35

Assume that First National Bank will continue to pay dividends at the same rate as that of the last year.