You are considering the purchase of XYZ Company's ordinary shares which will pay a $1.00 per share dividend one year from the date of purchase.The dividend is expected to grow at the rate of 4% per year.If the appropriate discount rate for this investment is 14%,what is the price of one share of XYZ?
A)$7.14
B)$10.00
C)$25.00
D)Cannot be determined without maturity date

Question

Quizplus · Accepted Answer

Using the dividend discount model, the price of the stock would be:
P = D / (r - g)
Where:
D = expected dividend = $1.00
r = discount rate = 14%
g = expected dividend growth rate = 4%
P = $1.00 / (0.14 - 0.04) = $10.00
Therefore, Choice B is the correct answer.

You Are Considering the Purchase of XYZ Company's Ordinary Shares