You wish to earn a return of 11% on each of two stocks, C and D. Stock C is expected to pay a dividend of $3 in the upcoming year while stock D is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock C
A) will be greater than the intrinsic value of stock D.
B) will be the same as the intrinsic value of stock D.
C) will be less than the intrinsic value of stock D.
D) will be the same or greater than the intrinsic value of stock D.
E) None of the options.

Question

Quizplus · Accepted Answer

The intrinsic value of a stock is calculated using the Gordon Growth Model: P = D / (r - g). For Stock C, P = 3 / (0.11 - 0.07) = 75. For Stock D, P = 4 / (0.11 - 0.07) = 100. Therefore, the intrinsic value of Stock C is less than that of Stock D.

You Wish to Earn a Return of 11% on Each