Question

a share of common stock just paid a dividend of $1.00. if the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 10.2%, then what is the stock price? a. $16.47 b. $23.50 c. $24.37 d. $23.93 e. $21.96

Answer 1

C

Step-by-step explanation:

The correct answer is option (c) $24.37.

We can use the constant growth model to calculate the price of the stock:

P = D / (r - g)

Where:

P = price of the stock

D = dividend per share

r = required rate of return

g = expected long-run growth rate

Substituting the given values, we get:

P = 1 / (0.102 - 0.054)

P = 1 / 0.048

P = $20.83

However, this is the price of the stock today. To find the price of the stock after one year, we need to add the expected dividend and growth:

P1 = (1 + g) * (D1 / (r - g))

where

D1 = D * (1 + g)

Substituting the given values, we get:

D1 = 1 * (1 + 0.054) = 1.054

P1 = (1 + 0.054) * (1.054 / (0.102 - 0.054))

P1 = 1.054 * 18.75

P1 = $19.78

Therefore, the expected stock price is $19.78 after one year.