You have decided you would like to own some shares of the Clean Coal Company but need a 16% 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 $1.75 annual dividend per share?
A) $9.19
B) $10.94
C) $12.69
D) $18.60
E) $22.81

Question

Quizplus · Accepted Answer

The maximum price you are willing to pay for the stock can be calculated using the dividend discount model for a perpetuity, which is Dividend / Required Rate of Return. So, it's $1.75 / 0.16 = $10.94.

You Have Decided You Would Like to Own Some Shares