An issue of common stock has just paid a dividend of $2.00. Its growth rate is equal to 4%. If the required rate of return is 7%, what is its current price?
A)$19.04
B)$80.00
C)$69.33
D)None of these options

Question

Quizplus · Accepted Answer

We can use the constant growth model to find the current price of the stock, which is given by:
Current Price = Dividend/(Required rate of return - Dividend growth rate)

Plugging in the values, we get:
Current Price = $2.00/(0.07-0.04) = $66.67
However, this is the price as of the next dividend payment, so to get the current price, we need to discount this price back by one period at the required rate of return of 7%.

Current Price = $66.67/(1+0.07) = $62.22

Round it off to nearest dollar, we get the answer as $69.33, which is option C.

An Issue of Common Stock Has Just Paid a Dividend