The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 15 percent rate of return?

Question

Quizplus · Accepted Answer

We can use the dividend discount model with the given information to calculate the current stock price:
Price = Dividend / (Required rate of return - Dividend growth rate)
Since the dividend is constant, the dividend growth rate is 0.
Price = $1.25 / (0.15 - 0) = $8.33
Therefore, the best choice is B.

The Pancake House Pays a Constant Annual Dividend of $1