Common stock of Mountain Co. is currently at a market price of $52/share with $5

Question

Common stock of Mountain Co. is currently at a market price of $52/share with $5/share dividends for many years and are expected to remain the same forever. Also other companies with similar risks and characteristics yield 10% in the marketplace. What should you do concerning Mountain company?

(A) It should be purchased at $52 per share, because that is a fair price.

(B) It should be purchased at $52 per share, because it will yield 10.1%.

(C) It should not be purchased, because it will yield only 2%.

(D) It should not be purchased at more than $50 per share.

Explanation / Answer

Intrinsic value of share = Annual dividend/market required yield

= $5/10%

= $50

Correct option is (D)

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