An investor expects earnings from a stock to grow at a constant rate of 3% over time and the investors' rate of discount is constant at 4%.If earnings last year were $152, then the fundamental value of the stock would be

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Quizplus · Accepted Answer

The fundamental value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model), which is P = D / (r - g), where P is the price, D is the dividend (or earnings in this case), r is the discount rate, and g is the growth rate. Here, P = $152 * (1 + 0.03) / (0.04 - 0.03) = $15,656.

An Investor Expects Earnings from a Stock to Grow at a Constant