Each of two stocks,C and D,are expected to pay a dividend of $3 in the upcoming year.The expected growth rate of dividends is 9% for both stocks.You require a rate of return of 10% on stock C and a return of 13% on 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)cannot be calculated without knowing the market rate of return
E)none of the above is true.

Question

Quizplus · Accepted Answer

The intrinsic value of a stock is calculated using the Gordon Growth Model: P = D / (r - g). For stock C, P = 3 / (0.10 - 0.09) = $300. For stock D, P = 3 / (0.13 - 0.09) = $75. Therefore, the intrinsic value of stock C is greater than that of stock D.

Each of Two Stocks,C and D,are Expected to Pay a Dividend