A company has an EPS of US$12 per share. It pays out its entire earnings as...

A company has an EPS of US$12 per share. It pays out its entire earnings as dividend. It has a growth rate of zero and a required return on equity of 8 percent per annum. Assuming all cashflows are perpetuities, what will be the price of the company’s stock?

Select one:

a. USD83.43

b. USD155.00

c. USD85.00

d. USD150.00

Expert Solution

What will be the price of the company’s stock?

Answer: USD150.00

Workings

Value of the stock is the present value of future dividends, Since in the given case company is paying dividend in perpetuity, in order to find the value of the share we need to find the present value of perpetual dividend. Formula for find the present value of perpetual dividend is as follows;

Present value of perpetual dividend = Dividend ÷ required rate on equity

= $12 ÷ 0.08

= $150

jeff jeffy answered 2 years ago

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