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What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%
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What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%

User Sparik
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1 Answer

5 votes

Answer:

The price should be P0 = $34.56

Step-by-step explanation:

The value or price of a stock today can be whose dividend growth is zero can be calculated using the zero growth model of DDM. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = Dividend / r

Where,

  • r is the required rate of return

P0 = 4.32 / 0.125

P0 = $34.56

User GusSL
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