Question

Question:Stagnant Iron and Steel currently pays a $12.25 annual cash dividend (D0). The company plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke) is 18 percent, what is the price of the common stock?

Short answer

Answer

The price of the stock is $68.06

Step-by-step solution

Definition of Dividend

Common stocks are defined as the type of stocks which represents the ownership of the company and are not entitled to the fixed dividend like preference shareholders.

Computation of Price of stock for part b

$$\begin{gathered} \mathbf{Price}\mathbf{}\mathbf{of}\mathbf{}\mathbf{stock}\mathbf{}\mathbf{\left(}\mathbf{P}\mathbf{0}\mathbf{\right)}\mathbf{=}\frac{\mathbf{D}\text{ividend}}{\left(\mathbf{Required}\mathbf{}\mathbf{}\mathbf{rate}\mathbf{}\mathbf{of}\mathbf{}\mathbf{return}\mathbf{-}\mathbf{Growth}\mathbf{}\mathbf{Rate}\right)} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{12}\mathbf{.}\mathbf{25}}{\left(\mathbf{0}\mathbf{.}\mathbf{18}\mathbf{-}\mathbf{0}\right)} \\ \mathbf{=}\mathbf{\$}\mathbf{68}\mathbf{.}\mathbf{06} \end{gathered}$$