Zero-Sum Enterprise pays an annual dividend of $1.40 per share and neither earnings nor dividends are expected to grow in the future. What is the value of Zero-Sum's stock to an investor who requires a 14 percent rate of return?

Question

Quizplus · Accepted Answer

According to the dividend discount model, the stock value is calculated as follows: Stock Value = Dividend / (required rate of return - growth rate) Since there is no growth, the growth rate is zero. Thus, Stock Value = $1.40 / (0.14 - 0) = $10.00. Therefore, the value of Zero-Sum's stock to an investor who requires a 14 percent rate of return is $10.00.

Zero-Sum Enterprise Pays an Annual Dividend of $1