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What is the value of a share that has been paying $2 dividends with no growth prospects, and a required rate of return of 10%?

Question

What is the value of a share that has been paying $2 dividends with no growth prospects, and a required rate of return of 10%?

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Solution

The value of a share can be calculated using the Dividend Discount Model (DDM) when dividends are not expected to grow. The DDM formula is:

P = D / r

where: P = price of the stock D = annual dividends per share r = required rate of return

Given in the question: D = $2 (annual dividends per share) r = 10% or 0.10 (required rate of return)

Substituting these values into the formula:

P = 2/0.10=2 / 0.10 = 20

So, the value of the share is $20.

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