Assume that the dividend ($3.25) on Central Power Company's common stock issue is paid annually at the end of the year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12 percent rate of return.
A) $3.25
B) $39
C) $12
D) $27.08

Question

Quizplus · Accepted Answer

The formula to find the value of the stock is:
Value of Stock = Dividend / (Rate of Return – Growth Rate)
Here, the dividend is $3.25 and the growth rate is assumed to be zero since it's not expected to increase for the foreseeable future. The rate of return required by the investor is 12%, which is the same as the discount rate. Therefore,
Value of Stock = $3.25 / (0.12 – 0) = $27.08
So, the best choice is D.

Assume That the Dividend ($3