Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.40 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 15.70 percent on your equity investments?

The maximum amount that should be paid for one share of this stock today is $15.29

Explanation:

The price of a stock which pays a constant dividend forever can be calculated using the zero dividend growth model of the Dividend Discount Model (DDM) approach. The DDM values a stock based on the present value of the expected future dividends from the stock discounted using the required rate of return on stock.

The formula for price under zero growth model of DDM is,

Price today (P0) = Dividend / required rate of return

P0 = 2.4 / 0.1570

P0 = $15.286 rounded off to $15.29

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