Question

Gold Coast Health System just paid an annual dividend of $1.50, which is expected to grow at a constant rate of 5 percent per year. If the current required rate of return is 15 percent, what is the value of Gold Coast’s stock?

A) $15.75
B) $15.50
C) $15.25
D) $15.00
E) $14.75

Answer 1

Answer: Po = Do(1+g )/ke-g

Po = $1.50(1+0.05)/0.15-0.05

Po = $1.50(1.05)/0.10

Po = $1.575/0.10

Po = $ 15.75

The correct answer is A

Explanation: In this question, there is need to calculate the value of the company's stock on the ground that dividend has been paid. The value of the stock is a function of current divided paid, growth rate and the required rate of return on the stock.