A common share pays an annual dividend per share of $1.80. The risk-free rate is 5 per cent and the risk premium for this share is 4 per cent. If the annual dividend is expected to remain at $1.80 per share, what is the value of the share?

Question

Quizplus · Accepted Answer

The value of a share can be determined by the dividend discount model:

Value of share = Dividend per share / (discount rate - growth rate)

The discount rate in this case is the risk-free rate plus the risk premium: 5% + 4% = 9%.

Since the annual dividend is expected to remain at $1.80, the growth rate is 0.

Therefore, the value of the share is:

Value of share = $1.80 / (0.09 - 0) = $20.00

So, the best choice is B.

A Common Share Pays an Annual Dividend Per Share of $1.80