NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest toQuestion 3Answera.$9.60b.$12.00c.$13.20d.$14.40
Question
NoGrowth Industries presently pays an annual dividend of 9.60b.13.20d.$14.40
Solution
The value of a share of NoGrowth's stock can be calculated using the Gordon Growth Model, which is a model used to determine the intrinsic value of a stock, excluding constant growth. The formula is:
P = D / r
where: P = price of the stock D = annual dividends per share r = cost of equity capital
Given that D = $1.20 and r = 10% or 0.10, we can substitute these values into the formula:
P = 12.00
So, the value of a share of NoGrowth's stock is closest to $12.00 (option b).
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