Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment. (The required rate of return is 10 percent.)

Question

Alayna Rowland

Business

25 June, 08:15

Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment. (The required rate of return is 10 percent.)

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Answers (1)

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Lamont Wiggins · Answer 1

The stock price after the dividend payment is $100 per share

Explanation:

According to the data the Dividend per year is $1,000 and the Required Rate of Return is 10%.

Hence, in order to calculate the stock price after the dividend payment we have to use the following formula first:

Stock price = [Total Dividend amount / Required rate of return]

Stock price = [$1,000 / 0.10]

Stock price = $10,000

Finally the Stock price after the dividend payment. = [Total Stock Value / Number of outstanding shares]

Total Stock value = $10,000

Number of outstanding shares = 100 shares

Stock price after the dividend payment = [$10,000 / 100 shares]

Stock price after the dividend payment = $100 per share