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:

Question

BlackTom AI · Accepted Answer

Let’s break down what the problem is saying and evaluate each option against that setup.
Option 1: 'priced the same as a $1 perpetuity.' This aligns with the idea that a stock delivering a constant dividend of $1 forever (a perpetuity with no growth) should be valued like a perpetuity: price = dividend / required return. Since the dividend is constant and forever, the stock’s price behaves like a $1 perpetuity's price at the same discount rate. This option captures the essence of the no-growth perpetuity valuation commonly taught in dividend discount models.
Option 2: 'valued at an assumed growth rate of 1 percent.' This is inconsistent with the information: the dividend has been constant at $1 and is expected to continue paying $1 long into the future, i.e., there is no growth. Introducing a 1% growth assumption would contradict the statement that the dividend remains at $1.
Option 3: 'worth $1 per share in the current market.' This would imply the stock is worth exactly its annual dividend, which ignores the time value of money and the fact that the investor receives dividends indefinitely. In a standard no-growth perpetuity, the price is generally much higher than the annual dividend unless the required return is extremely high, so this is not correct.
Option 4: 'basically worthless as it offers no growth potential.' The absence of growth does not make a perpetuity worthless; the value comes from the stream of future dividends and the appropriate discount rate. For a perpetual, fixed dividend, the present value can be substantial rather than near zero, provided a reasonable discount rate.
Option 5: 'equal in value to the present value of $1 paid one year from today.' This captures only the PV of a single future payment, not the infinite series of $1 payments. The total stock value should reflect all future dividends, not just the next one, so this underestimates the price.
In summary, the reasoning consistent with a constant $1 dividend forever is that the stock's price should be evaluated as a no-growth perpetuity, making the first option the correct framing, while the remaining options misapply growth assumptions, misstate the valuation logic, or incorrectly limit the scope of the cash flows.

BUSFIN 3220 AU2025 (2110) Exam 2 - Requires Respondus LockDown Browser

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:

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?

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?

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