Question

19. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.30 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 11.60 percent on your equity investments

Answer 1

The maximum that should be paid for the stock today is P0 = $19.82758621 rounded off to $19.83

Step-by-step explanation:

Using the zero growth model of dividend discount model, we can calculate the price of the stock today. 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 = 2.3 / 0.1160

P0 = $19.82758621 rounded off to $19.83