You wish to earn a return of 10% on each of two stocks,C and D.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock C and 10% for stock D.The intrinsic value of stock C _____.
A)will be greater than the intrinsic value of stock D
B)will be the same as the intrinsic value of stock D
C)will be less than the intrinsic value of stock D
D)A or B
E)none of the above is a correct statement.

Question

Quizplus · Accepted Answer

The intrinsic value of a stock is calculated using the Gordon Growth Model: P = D / (r - g). For stock C, with a growth rate of 9%, the intrinsic value is higher than for stock D, which has a growth rate of 10%, because the denominator (r - g) is smaller for stock C, resulting in a higher intrinsic value.

You Wish to Earn a Return of 10% on Each