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 after the dividend payment. (The required rate of return is 10%)

Question

Quizplus · Accepted Answer

The present value of perpetuity dividend formula is:
Stock Price = Dividend / Required Rate of Return
Stock Price = $1,000 / 10% = $10,000 / 100 = $100
After paying out the $1,000 dividend, the new stock price will be:
Stock Price = Dividend / Required Rate of Return
Stock Price = $1,000 / 10% = $10,000 / 100 = $90
Therefore, the correct answer is B.

Company X Has 100 Shares Outstanding