What would be the maximum an investor should pay for the common stock 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%.
A) $17.00
B) $9.52
C) $10.88
D) $12.24

Question

Quizplus · Accepted Answer

The value of a stock that pays a constant dividend can be calculated using the dividend discount model for a perpetuity: $P = \frac{D}{r}$, where $P$ is the price of the stock, $D$ is the dividend per share, and $r$ is the required rate of return. Plugging in the given values: $P = \frac{1.36}{0.125} = 10.88$.

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