Xinhua Manufacturing Company has been generating stable revenues but sees no growth in it for the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round the final answer to two decimal places.)
A) $39.00
B) $3.69
C) $27.08
D) $21.23

Question

Quizplus · Accepted Answer

To calculate the stock price, we can use the constant growth model:
Stock price = (dividend ÷ (required rate of return - growth rate))

Since there is no growth expected, the growth rate is zero. Thus, the equation becomes:
Stock price = (dividend ÷ required rate of return)

Substituting the given values, we get:
Stock price = ($3.25 ÷ 0.12) = $27.08

Therefore, the stock is worth $27.08 today, and the correct choice is C.

Xinhua Manufacturing Company Has Been Generating Stable Revenues but Sees