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Homework answers / question archive / Ron Santana is interested in buying the stock of First National Bank
Ron Santana is interested in buying the stock of First National Bank. While the bank's management expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $5.78. If Ron requires a return of 10.5 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank's stock? (Round answer to 2 decimal places, e.g. 15.20.)
Computation of maximum price that Ron should be willing to pay for a share of the bank's stock;
Maximum price=Dividend for next period/ (required return- growth rate)
= 5.78/ 10.5%
=$55.05
