The Asian Tiger pays a constant annual dividend of $1.18 per share. How much are you willing to pay for one share if you require a 15 percent rate of return?

Question

BlackTom AI · Accepted Answer

We’re valuing a stock that pays a constant annual dividend of $1.18 per share and requires a 15% rate of return. This is a perpetuity where the price equals the dividend divided by the required return (P = D / r).

Option 1: $7.87. This matches the formula P = 1.18 / 0.15 = 7.866..., which rounds to $7.87. This is the correct value under the perpetuity model with a constant dividend.

Option 2: $8.33. This would imply a required return of D / P = 1.18 / 8.33 ≈ 0.142, i.e., about 14.2%. Since the problem states a 15% required return, this price would be too high to meet that hurdle.

Option 3: $10.87. If priced at $10.87, the implied required return would be D / P = 1.18 / 10.87 ≈ 0.1086, or about 10.9%. This is far below the stated 15% requirement, so it does not satisfy the given return criterion.

Option 4: $11.04. This price implies a required return of 1.18 / 11.04 ≈ 0.107, or about 10.7%. Again, this is inconsistent with a 15% required return.

In summary, the only price that aligns with a 15% required return for a perpetual $1.18 annual dividend is the dividend divided by the required return, which yields $7.87. The other options correspond to lower or higher implied yields that do not match the given rate of return.

The Asian Tiger pays a constant annual dividend of $1.18 per share. How much are you willing to pay for one share if you require a 15 percent rate of return?

View Explanation

Log in for full answers

Similar Questions

A project generates $100 forever with certainty and cash flows grow at the inflation rate. The nominal interest rate is 4% (real interest rate = 2% and inflation = 2%). Ignore taxes. What is the project’s value?

A bond with unlimited maturity (a perpetuity bond) has a face value of $1,000, and a coupon rate of 5%. If the market interest rate is 10%, what is the current market price of this bond?

You are evaluating a perpetuity that pays $5,000 annually. If the discount rate is 8%, what is the present value of this perpetuity?

The cost of preferred stock is equivalent to the:

A preferred stock pays a dividend of $3.50 in perpetuity. If the return required by shareholders is 11%, what is the price per share for this preferred stock?

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler