What would be the maximum an investor should pay for the ordinary equity of a ﬁrm that has no growth opportunities but pays a dividend of €1.36 per year? The next dividend will be paid in Exactly 1 year.The required rate of return is 12.5%.

Question

Quizplus · Accepted Answer

The price of ordinary equity can be calculated using the dividend discount model (DDM):
Price = Dividend / (Required rate of return - Dividend growth rate)
Since the firm has no growth opportunities, the dividend growth rate is zero.
So, 
Price = 1.36 / (0.125 - 0) = €10.88
Therefore, the maximum an investor should pay for the ordinary equity is €10.88, which is option B.

What Would Be the Maximum an Investor Should Pay for the Ordinary