What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.85 per year? The next dividend will be paid in exactly 1 year.The required rate of return is 14.5%.

Question

Quizplus · Accepted Answer

To figure out the maximum an investor should pay for the common stock, we can use the dividend discount model, which is:

stock price = dividend / (required rate of return - dividend growth rate)

Since there are no growth opportunities, the dividend growth rate is 0.

Plugging in the given values, we get:

stock price = $1.85 / (0.145 - 0) = $12.76

Therefore, the maximum an investor should pay for the common stock is $12.76.

The answer is C, $12.76.

What Would Be the Maximum an Investor Should Pay for the Common