How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?

Question

Quizplus · Accepted Answer

First, we need to find the expected dividend yield:
Expected return = expected dividend yield + expected capital appreciation
16% = expected dividend yield + 10%
Expected dividend yield = 6%

Next, we can use the constant growth formula to solve for the current stock price:
PS0 = D1 / (r - g) where PS0 is the current stock price, D1 is the expected dividend for next year, r is the required rate of return, and g is the constant growth rate.
PS0 = 0.06 / (0.16 - 0.10) = $45.45

Therefore, the best choice is C, which is the closest option to $45.45.

How Much Should You Pay for a Share of Stock