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andreyandreev [35.5K]
3 years ago
10

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
Business
1 answer:
lilavasa [31]3 years ago
3 0

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

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