A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 12.5%,and the expected constant growth rate is g = 8.5%.What is its current price?

Question

Quizplus · Accepted Answer

Using the constant growth model:
P0 = D1 / (r - g)
where:
D1 = expected dividend next year = $0.75
r = required rate of return = 12.5% = 0.125
g = expected growth rate = 8.5% = 0.085

P0 = 0.75 / (0.125 - 0.085) = $18.75

Therefore, the current price of the stock is $18.75, so the best choice is C.

A Stock Is Expected to Pay a Dividend of $0