Question

An issue of common stock has an expected dividend to be paid at the end of the year of $5 per share, and has an expected growth rate for the foreseeable future of 5% per year. If investors’ required rate of return for this particular security is 12% per year, how much should it be selling for? Round to the nearest cent. Do not include the dollar sign in your answer. (i.e. If your answer were $1.23, then type 1.23 without a $ sign

Answer 1

Explanation:

D1- dividend; Return-12%; Growth rate - 5%

Current price=D1/(Required return-Growth rate)

=5/(0.12-0.05) = 5/0.07 = $71.43