Uncle John's Pipe Company has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent?

Value of the common stock = $29.41

Explanation:

GIVEN the following ;

Dividend =$2.50

Rate of return (r) = 8.5% 0.085

The question above requires us to calculate the value of common stock which is equivalent to the present value of perpetuity which is the amount of a fixed income or cash flow an individual earns at regular interval for an INDEFINITE period.

RECALL;

PRESENT VALUE of PERPETUITY IS GIVEN BY:

PV of perpetuity = (Dividend or coupon per period ÷ interest rate(r))

PV of perpetuity = ($2.50 ÷ 0.085)

PV of perpetuity = $29.411

PV of perpetuity = $29.41

a. money supply  

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