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?
A) $42.00
B) $45.00
C) $45.45
D) $47.00

Question

Quizplus · Accepted Answer

We can use the constant-growth stock formula to solve for the stock price:
Price = (Dividend * (1 + Growth Rate)) / (Required Rate of Return - Growth Rate)
We know that the dividend is not given, but since it is a constant-growth stock, we can assume that the dividend will grow at the same rate as the stock price, which is 10%. Therefore, we can use the expected selling price of $50 as the future dividend:
Price = ($50 * (1 + 10%)) / (16% - 10%)
Price = $55 / 6%
Price = $45.45
Therefore, the best choice is C) $45.45.

How Much Should You Pay for a Share of Stock