If you expect a firm to pay a $1.8 per year in perpetuity, your tax rate...

If you expect a firm to pay a $1.8 per year in perpetuity, your tax rate is 25%, and your required rate of return is 12.4%. How much are you willing to pay for its stock? Round answer to two decimal places.

Expert Solution

Calculation of price of stock:

After tax return= required return*(1-tax)

After tax return= 12.4*(1-0.25)= 9.3%

Price of stock= cash flow/after tax return

Price of stock= 1.8/0.093= $19.35

Price of stock is $19.35

jeff jeffy answered 2 years ago

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If you expect a firm to pay a $1.8 per year in perpetuity, your tax rate...

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