What price would you expect to pay for a stock with 13 percent required rate of return, 4 percent rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?
A)$27.78
B)$30.28
C)$31.10
D)$31.39

Question

Quizplus · Accepted Answer

Using the Gordon growth model, we can calculate the expected price of the stock as follows:

Expected price = Dividend / (Required rate of return - Dividend growth rate)
Expected price = $2.50 / (0.13 - 0.04)
Expected price = $2.50 / 0.09
Expected price = $27.78

Therefore, the expected price of the stock is $27.78. However, since the dividend will be paid tomorrow, the stock price will likely be slightly higher than the expected price. The closest answer choice is D) $31.39.

What Price Would You Expect to Pay for a Stock