Question

Craftwell Inc. pays a​ $0.75 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual return of​ 10.5% on your​ investment?

Answer 1

Answer:

Quarterly dividend (D) = $0.75

Annual return (Ke) = 10.5% = 0.105

Quarterly return = 0.105/4 = 0.02625

Current market price = Quarterly dividend

                                       Quarterly return

                                   = $0.75

                                       0.02625

                                  = $28.57

Explanation:

Current market price is the ratio of quarterly dividend paid divided by quarterly return.