Alto stock pays an annual dividend of 110 a share and has do

Alto stock pays an annual dividend of $1.10 a share and has done so for the past 6 years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock

Select one:

A. is basically worthless as it offers no growth potential.

B. has a current market value of $1.10.

C. is valued as a differential growth stock.

D. is valued as a nonconstant growth stock.

E. is valued as a perpetuity.

Solution

Answer: E. is valued as a perpetuity.

the perpetual value would be value of one stock = $1.10/7.8% = $ 14.10