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 after the dividend payment.(The required rate of return is 10%.)

Question

Quizplus · Accepted Answer

The dividend per share is $1,000/100 = $10 per share.

Using the constant growth formula: 
Stock price = (Next year's expected dividend) / (Required rate of return - Dividend growth rate)

Since the firm expects to maintain this dividend forever, the dividend growth rate is 0.

Stock price = $10 / (0.10 - 0) = $100

Therefore, the correct answer is B, $100.

Company X Has 100 Shares Outstanding