Assume Zero-Sum Enterprise pays an annual dividend of $1.40 per share and that neither earnings nor dividends are expected to grow in the future. What is the value of Zero-Sum's stock to an investor who requires a 14 percent rate of return?
A) $14
B) $10
C) $20
D) $0

Question

Quizplus · Accepted Answer

The value of a perpetuity can be calculated by dividing the annual cash flow by the required rate of return. Therefore, the value of Zero-Sum's stock would be $1.40/0.14 = $10. Since the question does not state any additional information about the company's financials, we can assume that it does not have any debt or other assets, so the stock's value is equal to the company's total value.

Assume Zero-Sum Enterprise Pays an Annual Dividend of $1