What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The next dividend will be paid in exactly 1 year. The required rate of return is 12.5%.
A) $9.52
B) $10.88
C) $12.24
D) $17.00
E) None of these.

Question

Quizplus · Accepted Answer

The maximum price an investor should pay for a stock with no growth opportunities is calculated using the dividend discount model for a perpetuity: Price = Dividend / Required Rate of Return. Here, Price = $1.36 / 0.125 = $10.88.

What Would Be the Maximum an Investor Should Pay for the Common