Question

Zephyr Electricals is a company with no growth potential. Its last dividend payment was $4.50, and it expects no change in future dividends. What is the current price of the company's stock given a discount rate of 9 percent?

A) $40.50
B) $50.00
C) $45.00
D) $500.00

Answer 1

To find the current price of the company's stock, we can use the dividend discount model (DDM) which calculates the present value of all future dividends. Using the constant growth dividend discount model, the stock price for Zephyr Electricals would be $50.00.

Step-by-step explanation:

To find the current price of the company's stock, we can use the dividend discount model (DDM). The DDM calculates the present value of all future dividends by discounting them back to the present using a discount rate. In this case, since Zephyr Electricals expects no change in future dividends, we can use the constant growth dividend discount model.

The formula for the constant growth DDM is: Stock Price = Dividend / (Discount Rate - Growth Rate)

Given that the last dividend payment was $4.50 and the discount rate is 9 percent, the stock price would be: $4.50 / (0.09 - 0) = $4.50 / 0.09 = $50.00. So, the correct answer is $50.00.