Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000. She expects to receive annual dividends of $400 indefinitely from those shares. Assuming a discount rate of 8 percent, how does the price Angel paid compare to the value of the stock?

Question

Holly Farmer

Business

12 November, 00:05

Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000. She expects to receive annual dividends of $400 indefinitely from those shares. Assuming a discount rate of 8 percent, how does the price Angel paid compare to the value of the stock?

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Answers (1)

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Gordon Avila · Answer 1

Angle Paid $6,000 for the share which has value of $50,000.

Explanation:

The value of the stock is calculated by dividing the dividend (expected return) with Net Discount rate of Growth rate.

Expected Dividend = $400

Growth = 0% (as dividend is expected to be same for indefinite period of time)

Discount rate = 8%

Price of the Bond = Dividend / (Discount rate - Growth rate)

Price of the Bond = $4000 / (8% - 0%)

Price of the Bond = $4000 / 8%

Price of the Bond = $4000 / 0.08

Price of the Bond = $50,000

Angle Paid $6,000 for the share which has value of $50,000.