The common stock of Water Town Mills pays a constant annual dividend of $2.25 a share. What is one share of this stock worth at a discount rate of 16.2 percent?

Question

Quizplus · Accepted Answer

The value of a share of stock that pays a constant annual dividend can be calculated using the dividend discount model for perpetuities, which is given by Price = Dividend / Discount Rate. Here, Price = $2.25 / 0.162 = $13.89.

The Common Stock of Water Town Mills Pays a Constant