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 $1.36 per year? The required rate of return is 12.5 percent.
A)$9.52
B)$10.88
C)$11.24
D)$10.64
E)$11.47

Question

Quizplus · Accepted Answer

The maximum an investor should pay for the common stock is equal to the present value of its future dividends. Since the firm has no growth opportunities, the dividend payment is assumed to remain constant. Using the dividend discount model:

Maximum Stock Price = Dividend / (Required Rate of Return - Growth Rate)
Since there is no growth, the growth rate is 0.
P = $1.36 / (0.125 - 0) = $10.88

Therefore, the maximum an investor should pay for this common stock is $10.88, which is option B.

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