Question

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 14.2%, and if investors' required rate of return is 5.4%, what is the stock price?

(Multiple Choice)
a It cannot be determined based on the information given.
b $12.10
c $11.98
d $11.36
e $12.98

Answer 1

E

Step-by-step explanation:

For a stock that pays dividends in perpetuity (forever)

`P=(D)/(i-g)`

Where D= first dividend (paid at the end of the period)

i= interest rate

g= growth rate

In our case D= 1*1.142 = 1.142. We multiply by 1+14.2% because a dividend of 1 was already paid.

`P=(1.142)/(.142-.054)= 12.977= 12.98`