A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 7.5%.What price would an investor be expected to pay per share ten years in the future?

Question

Quizplus · Accepted Answer

The price of a stock with constant dividends can be calculated using the formula for a perpetuity: Price = Dividend / Cost of Capital. Here, Price = $1.25 / 0.075 = $16.67. Since the dividends and cost of capital are constant, the price remains the same in the future.

A Stock Is Expected to Pay $1