Craftwell Inc.pays a $0.75 dividend every quarter and will maintain this policy forever.What price should you pay for one share of common stock if you want an annual return of 10.5% on your investment?

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the dividend discount model for a perpetuity, which is Dividend / Required Rate of Return. Here, the annual dividend is $0.75 * 4 = $3.00, and the required rate of return is 10.5% or 0.105. Thus, the price is $3.00 / 0.105 = $28.57.