A share of stock expected to pay an annual dividend of $12 forever has a market price of __________ when the Treasury bond rate is 6.5% and the stock has a risk premium of 4.5%.
A) $109.09
B) $184.62
C) $266.67
D) $600

Question

Quizplus · Accepted Answer

The correct answer is A because the market price of the stock can be calculated using the dividend discount model, which is:Market price = Dividend / (Required rate of return)Required rate of return = Treasury bond rate + Risk premiumTherefore, Market price = $12 / (0.065 + 0.045) = $109.09

A Share of Stock Expected to Pay an Annual Dividend