Alto stock pays an annual dividend of $1.10 a share and has done so for the past 6 years.No changes in the dividend amount are expected.The relevant market rate of return is 7.8 percent.Given this,one share of this stock
A)is basically worthless as it offers no growth potential.
B)is valued as a nonconstant growth stock.
C)is valued as a perpetuity.
D)is valued as a differential growth stock.
E)has a current market value of $1.10.

Question

Quizplus · Accepted Answer

Since the dividend payment is expected to remain constant and there is no growth potential, we can value the stock as a perpetuity using the dividend discount model. The value of one share of the stock can be calculated as follows:
Value of stock = Annual dividend payment / Required rate of return
Value of stock = $1.10 / 0.078
Value of stock = $14.10 (rounded to two decimal places)
Therefore, one share of the Alto stock has a current market value of $14.10.

Alto Stock Pays an Annual Dividend of $1