You have decided that you would like to own some shares of Martin & Miller (M&M) but need an expected 15% rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend today to buy one share of M&M stock if the company pays a constant $3 annual dividend per share?
A) $15.00
B) $16.25
C) $17.50
D) $18.75
E) $20.00

Question

Quizplus · Accepted Answer

The maximum amount you would be willing to spend today to buy one share of M&M stock, given a required rate of return of 15% and a constant annual dividend of $3, can be calculated using the dividend discount model for a perpetuity: Price = Dividend / Required Rate of Return. Thus, Price = $3 / 0.15 = $20.00.

You Have Decided That You Would Like to Own Some