Question

A share of common stock just paid a dividend of $3.25. The expected long-run growth rate for the stock is 18%. If investors require a rate of return of 24%, what should be the price of the stock?

a) $25.00
b) $32.81
c) $30.85
d) $35.94

Answer 1

Using the Gordon Growth Model and the provided figures of a $3.25 dividend, an 18% growth rate, and a required return of 24%, the calculated price would be $54.17, which does not match any of the options given in the question. option (A)

Step-by-step explanation:

To calculate the price of the stock given the dividend, growth rate, and required rate of return, we can use the Gordon Growth Model (Dividend Discount Model). The model is represented by the formula: Price = Dividend per share / (Required rate of return - Growth rate). In this case, the dividend is $3.25, the growth rate is 18%, and the required rate of return is 24%.

Using the formula, we can calculate the price as follows: Price = $3.25 / (0.24 - 0.18) = $3.25 / 0.06 = $54.17. However, since this answer is not listed in the provided options, it suggests there might be an error in the provided options or in the assumptions used such as the dividend amount, growth rate, or the required rate of return.