Question

Fake Company Mu has met its stated goal of growing dividends by 3.0% each year. The most recent dividend was $2.95. If your opportunity cost of money is 8.0%, what is an appropriate price for this stock (for you)?

(A) $60.77
(B) $59.00
(C) $36.88

Answer 1

The appropriate price for the stock of Fake Company Mu, given a 3.0% dividend growth rate, a recent dividend of $2.95, and an 8.0% opportunity cost, is calculated using the dividend growth model (DGM) and is $59.00.

Step-by-step explanation:

The student is asking about the valuation of a stock using the dividend growth model (DGM). To calculate an appropriate price for the stock of Fake Company Mu, which has a dividend growth rate of 3.0% and a most recent dividend of $2.95, we can use the formula P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate of the dividend. The opportunity cost of money, which is the required rate of return (r), is given as 8.0%.

Putting these values into the formula, we get P = $2.95 / (0.08 - 0.03) = $2.95 / 0.05 = $59.00. Therefore, an appropriate price for this stock for the student, considering an 8.0% opportunity cost, would be $59.00.