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27 January, 20:23

Stagnant Iron and Steel currently pays a $9.55 annual cash dividend (D0). They plan to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke) is 13 percent, what is the price of the common stock

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  1. 27 January, 20:27
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    The price of the common stock today is $73.46

    Explanation:

    The stock is a zero growth stock which means that the dividend has zero growth. For such a stock, the price or fair value is simply calculated just like the value of a perpetuity. The formula to calculate the price of a zero dividend growth stock is,

    P0 = D/Ke

    Where,

    Po is the price or fair value of the stock today D is the dividend paid today which will remain constant Ke is the required rate of return on such a stock

    Thus,

    P0 = 9.55 / 0.13

    P0 = $73.46
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