Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. If Matilda's equity cost of capital is 9%, which of the following would be closest to Matilda's stock price?

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BlackTom AI · Accepted Answer

We’re given a perpetuity: Matilda pays a fixed dividend of $2.10 per share forever, and the equity cost of capital is 9%. In a perpetuity, the stock price equals the dividend divided by the cost of capital: P = D / r.

Option 1: $14.00. If the price were $14.00, the implied yield would be D/P = 2.10 / 14.00 ≈ 0.150, or 15.0%. That does not match the stated cost of equity of 9%, so this price is inconsistent with the given data.

Option 2: $29.16. Here, the implied yield would be 2.10 / 29.16 ≈ 0.0720, or 7.20%. This is lower than the given 9% cost of equity, so this price would reflect a lower required return than specified, making it inconsistent.

Option 3: $23.33. Using the perpetuity formula P = D / r with D = 2.10 and r = 0.09 gives P = 2.10 / 0.09 = 23.333..., which rounds to $23.33. This price aligns exactly with the given cost of capital and the fixed dividend.

Option 4: $18.66. The implied yield would be 2.10 / 18.66 ≈ 0.1127, or 11.27%. This is higher than 9%, so it does not match the stated cost of equity.

Overall, you compare each option to the fundamental relationship P = D / r for a perpetuity with constant dividends. Values that yield a percentage different from the given 9% indicate inconsistency with the input data. The option that yields exactly 9% with the provided dividend is the one that matches the perpetuity price formula.

2025Spring-FIN2000-06 OPTIONAL | Practice Quiz for Topic 4 Stock Valuation I

Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. If Matilda's equity cost of capital is 9%, which of the following would be closest to Matilda's stock price?

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2025Spring-FIN2000-06 OPTIONAL | Practice Quiz for Topic 4 Stock Valuation I

Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. If Matilda's equity cost of capital is 9%, which of the following would be closest to Matilda's stock price?

View Explanation

Log in for full answers

Similar Questions

ABC, Inc. just paid a dividend of​ $2. ABC expects dividends to grow at​ 10% annually forever. The return on shares like​ ABC, Inc. is typically around​ 12%. What is the most you would pay for ABC’s share?

ALP’s most recent dividend was​ $2.00 per share and is selling today for​ $70. The dividend is expected to grow at ​ 7% per year for the foreseeable future. Should you purchase the share if the market return is​ 10% on investments with comparable​ risk?

Using a dividend discount model, find the intrinsic value (price at time zero) for a firm whose expected dividend is $1.92 and growth in dividends for year 2, 3, and 4 is 23.2% and constant growth afterwards is 0.54%. The cost of equity is 9.21%. (Answer in 2 decimal places, 6.21 for $6.21).

Using a dividend discount model, find the intrinsic value (price at time zero) for a firm whose expected dividend is $1.37 and growth in dividends for year 2, 3, and 4 is 13.8% and constant growth afterwards is 1.42%. The cost of equity is 6.67%.

AWSM has just paid a dividend of $1.24 and is expected to increase the future dividends at a rate of 3% per year indefinitely. If you, as a shareholder, require 12% per year, what is the current price per share?

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ALP’s most recent dividend was $2.00 per share and is selling today for $70. The dividend is expected to grow at 7% per year for the foreseeable future. Should you purchase the share if the market return is 10% on investments with comparable risk?