MJ Enterprises stock traditionally provides an average rate of return of 11.6 percent.The firm's next annual dividend is projected at $2.40 with future increases of 3 percent per year.What price should you pay for this stock if you are satisfied with the firm's average rate of return?

Question

Quizplus · Accepted Answer

We can use the dividend discount model to calculate the stock price:
P = D / (r - g)
Where:
P = stock price
D = expected dividend
r = required rate of return (in this case, the average rate of return of 11.6%)
g = growth rate of dividends

Plugging in the values:
P = 2.40 / (0.116 - 0.03)
P = 27.91

Therefore, the best choice is C, as it is the closest value to the calculated stock price.

MJ Enterprises Stock Traditionally Provides an Average Rate of Return