You want to purchase some shares of Green World stock but need a 15 percent rate of return to compensate for the perceived risk of such ownership.What is the maximum you are willing to spend per share to buy this stock if the company pays a constant $0.90 annual dividend per share?
A)$5.40
B)$6.00
C)$6.90
D)$7.20
E)$7.80

Question

Quizplus · Accepted Answer

The maximum price you are willing to pay is calculated using the dividend discount model for a perpetuity: Price = Dividend / Required Rate of Return = $0.90 / 0.15 = $6.00.

You Want to Purchase Some Shares of Green World Stock