A common stock pays an annual dividend per share of $1.80.The risk-free rate is 5 percent and the risk premium for this stock is 4 percent.If the annual dividend is expected to remain at $1.80 per share,what is the value of the stock?

Question

Quizplus · Accepted Answer

We can use the constant growth dividend discount model to calculate the value of the stock. The formula is:

Stock Value = Dividend / (Discount Rate - Growth Rate)

We know that the annual dividend is $1.80 per share, and the growth rate is zero because the dividend is expected to remain constant. The discount rate is equal to the sum of the risk-free rate and the risk premium, which is 9 percent (5 percent + 4 percent). Plugging these values into the formula gives us:

Stock Value = $1.80 / (0.09 - 0) = $20.00

Therefore, the value of the stock is $20.00.

A Common Stock Pays an Annual Dividend Per Share of $1.80.The