Midwest Corporation is expected to pay an annual dividend of $0.45 per share in the coming year,and to trade for $31.10 at the end of the year.If investments with the same risk as Midwest's stock have an expected return of 8.5%,what is the most you would pay today for Midwest's stock?

Question

Quizplus · Accepted Answer

Using the dividend discount model, the present value of the stock can be calculated as follows:

PV = D / (1+r)
PV = 0.45 / (1+0.085)
PV = 0.415
Therefore, the most you should pay today for Midwest's stock is $29.08 (0.415 x $31.10). Choice B is the correct answer.

Midwest Corporation Is Expected to Pay an Annual Dividend of $0.45