Question

The common stock of Water Town Mills pays an annual dividend of $1.84 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 13.6 percent annual return?

Answer 1

Answer:

The maximum that should be paid for a share of this stock today is $13.53.

Explanation:

The price of a company's stock which pays a constant dividend through out can be calculated using the zero growth model of the Dividend discount model (DDM). The formula for price of the stock today under DDM's zero growth model is,

P0 = D / r

P0 = 1.84 / 0.136

P0 = $13.529 rounded off to $13.53