NoGrowth Industries presently pays an annual dividend of $1.00 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to: ..... A. $10.00 B. $11.00 C. $8.00 D. $12.00
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![**Question:**
NoGrowth Industries presently pays an annual dividend of $1.00 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to:
- A. $10.00
- B. $11.00
- C. $8.00
- D. $12.00
**Explanation:**
The problem involves evaluating the value of a stock given a constant dividend and cost of equity. This is a classic example of a perpetuity, where the present value (\( P \)) is calculated using the formula for a perpetuity:
\[
P = \frac{D}{r}
\]
where:
- \( D \) is the dividend payment per share, which is $1.00.
- \( r \) is the equity cost of capital, which is 10% or 0.10.
Substituting these values into the formula gives:
\[
P = \frac{1.00}{0.10} = 10.00
\]
Therefore, the value of a share of NoGrowth's stock is closest to $10.00, corresponding to option A.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd210f98b-1208-4eea-a54e-043fbbd49724%2F01657b94-49e8-4149-aa88-3d9aa519f77a%2F6ta087q_processed.png&w=3840&q=75)
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