You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future.The company paid a dividend of $2.30 last year.If your required rate of return is 10 percent,what is the most you would be willing to pay for this share? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate. D1 = $2.30 * (1 + 0.06) = $2.438. P = $2.438 / (0.10 - 0.06) = $60.95, rounded to the nearest dollar is $61.

You Are Interested in Investing in a Company That Expects