Question

A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5 percentand the risk premium for this stock is 4 percent. If the annual dividend is expected to remain at$1.80 per share, what is the value of the stock?A. $17.78B. $20.00C. $40.00D. None of the above

Answer 1

Answer:

B. $20.00

Explanation:

To calculate the intrinsic value of a paying dividends stock we use the Gordon Growth Model. PV = D1 / (k +g). In this case, the dividend is not going to experience any growth (g) therefore g=0 And D1 =D0 Which equals 1.8. K is the expected rate of return which is calculated adding the risk premium and risk- free rate. K=5% + 4%=9%.

PV = 1.8 / 0.09

PV = 20.00