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%.

Question

Quizplus · Accepted Answer

The maximum an investor should pay for the common stock can be calculated using the dividend discount model:
Maximum Stock Price = Next Dividend / (Required Rate of Return - Dividend Growth Rate)

Since there is no growth opportunity, the dividend growth rate is zero. Therefore, the maximum stock price can be calculated as follows:

Maximum Stock Price = 1.36 / (0.125 - 0) = $10.88

Therefore, the investor should not pay more than $10.88 for the stock. Choice B is the best option as it is the closest to the calculated value.

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