Assume a stock pays a perpetual dividend of 2 dollars has a required rate of return of 9 a relative bidask spread of 05 and a relative trading frequency of 01 u=01Accordina to the Amihud and Mendelson

The formula for the Amihud and Mendelson (1986) model is:

Effective spread = (|R − Rm| / Rm) * sqrt(V)

where:

• R is the required rate of return
• Rm is the market rate of return
• V is the trading volume (as a fraction of total shares outstanding)

To find the price of the stock, we need to use the following formula:

Price = Dividend / (R - Effective spread)

First, we need to calculate the effective spread:

Effective spread = (|0.09 - 0| / 0) * sqrt(0.1) = infinity

Since the effective spread is infinite, we cannot use the Amihud and Mendelson (1986) model to calculate the price of the stock. This is likely due to the low trading volume (0.1) relative to the total shares outstanding.

Therefore, we cannot determine the price of the stock using the given information.