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Shareholders of UOI Corp. have a required return of 14 percent and expect UOI's dividend to...

Shareholders of UOI Corp. have a required return of 14 percent and expect UOI's dividend to grow at 5 percent annually. This year's dividend was $2.00. Holding all else constant, suppose UOI management announces a dividend freeze; dividends will be held constant into the foreseeable future. What will be the new price of UOI stock?

$23.33

$14.29

$15.45

$21.56

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Answer #1

This question requires application of constant growth dividend discount model according to which: Div Po r-g Po Price of Stoc

Now, with new information, g = 0

Div1 = Div0

P_0 = \frac{2}{0.14}

P_0 = 14.29 ---> Answer

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