An issue of common stock is expected to pay a dividend of $5.15 at the end of the year. Its growth rate is equal to 6%. If the required rate of return is 10%, what is its current price?
A)$128.75
B)$36.92
C)$96.00
D)None of these options

Question

Quizplus · Accepted Answer

The current price of the stock can be calculated using the dividend discount model:P = D / (r - g)where:P is the current price of the stockD is the expected dividend at the end of the yearr is the required rate of returng is the growth rate of the dividendIn this case, we have:D = $5.15r = 10%g = 6%Substituting these values into the formula, we get:P = $5.15 / (0.10 - 0.06) = $128.75Therefore, the current price of the stock is $128.75.

An Issue of Common Stock Is Expected to Pay a Dividend