Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, calculate the stock price today. (The required rate of return is 10 percent.)

Question

Quizplus · Accepted Answer

The price of a stock is equal to the present value of all future dividends discounted at the required rate of return. In this case, the dividends are expected to stay constant indefinitely, so we can use the perpetuity formula:

Price = Dividend / Required Rate of Return

Price = $1,000 / 0.10 = $10,000
Price per share = $10,000 / 100 = $100

Therefore, the correct answer is B) $100.

Company X Has 100 Shares Outstanding