Using the stock valuation formula calculate the value of a share of stock if it is expected to pay $5 in dividends,in addition the dividends are expected to grow at a rate of 4 percent forever,and the investor's required rate of return is 12 percent.

Question

Quizplus · Accepted Answer

The stock valuation formula for a perpetuity with growth is P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. Plugging in the values: P = $5 / (0.12 - 0.04) = $62.50.

Using the Stock Valuation Formula Calculate the Value of a Share