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The common stock of Ecolab pays an annual dividend of $1.84 a share. The company has promised to maintain a constant dividend regardless of economic conditions. How much would investors be willing to pay for one share of Ecolab's stock assuming an equity cost of capital of 13.6%?

Respuesta :

Answer:

$13.53

Explanation:

Data provided in the question:

Annual dividend per share, D0 = $1.84

Cost of capital, ke = 13.6% = 0.136

Now,

since,

the dividend remains the constant, the growth rate (g) of the dividend will be 0%

Also,

Current price = [ D0 × ( 1 + g ) ] ÷ [ ke - g ]

= [ $1.84 × ( 1 + 0% ) ] ÷ [ 13.6% - 0% ]

= $1.84 ÷ 0.136

= $13.53

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