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Pachacha [2.7K]
3 years ago
12

Stagnant Iron and Steel currently pays a $9.55 annual cash dividend (D0). They plan to maintain the dividend at this level for t

he 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
Business
1 answer:
denis-greek [22]3 years ago
3 0

Answer:

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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