Question

How much should you pay for a share of stock that offers a constant-growth rate of 10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?

Answer 1

The you should expect to pay $45.45

Step-by-step explanation:

Paticulars Amount

D2 = (ke-g)P1

D2 = (16% - 10%)*50

D2 = (6%)*50

D2 = 3

D1 = 3/1.10 2.7273

P0 =D1/(ke - g)

P0 =2.7273/(16%-10%)

P0 =2.7273/6%

P0 = 45.45

Therefore, The you should expect to pay $45.45