Question

Ron Santana is interested in buying the stock of First National Bank. While the bank expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $6.14. If Ron requires a return of 16.0 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank

Answer 1

Answer:

$38.375

Explanation:

In this question, we apply the Gordon model which is shown below:

Maximum price = Next year dividend ÷ (Required rate of return - growth rate)

= $6.14 ÷ 0.16

= $38.375

We simply divide the dividend rate by the required rate of return so that the accurate and maximum price can come. The growth rate is not given so we do not consider it.