A company is expected to pay a dividend of $1.25 per share every year indefinitely and the equity cost of capital for the company is 7.5%. What price would an investor be expected to pay per share ten years in the future?

Question

Quizplus · Accepted Answer

The price of a stock with constant dividends can be calculated using the formula P = D / r, where P is the price, D is the dividend, and r is the cost of capital. Here, P = $1.25 / 0.075 = $16.67. Since the dividend and cost of capital are constant, the price remains the same in the future.

A Company Is Expected to Pay a Dividend of $1