Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever,calculate the stock price today.(The required rate of return is 10%.)

Question

Quizplus · Accepted Answer

The price of the stock today can be calculated using the dividend discount model:

Stock price = Dividend / Required Rate of Return

In this case, the annual dividend is $1,000 and the required rate of return is 10% (0.10):

Stock price = $1,000 / 0.10 = $10,000

Since there are 100 shares outstanding, the stock price per share is:

Stock price per share = $10,000 / 100 = $100

Therefore, the stock price today is $100.

Company X Has 100 Shares Outstanding