Your friend has recommended that you purchase stock in company XYZ.It is expected to pay a $4 dividend,and has historically grown at 5%.If the required rate of return is 12%,what is the estimated value of a share of XYZ stock?

Question

Quizplus · Accepted Answer

To calculate the estimated value of a share of XYZ stock, we can use the Gordon Growth Model:

Estimated Value = D / (r - g)

Where: 
D = Expected dividend per share = $4 
r = Required rate of return = 12% 
g = Historical growth rate = 5%

Plugging in the values:

Estimated Value = 4 / (0.12 - 0.05) = 57.14

Therefore, the estimated value of a share of XYZ stock is $57.14. The best choice is C.

Your Friend Has Recommended That You Purchase Stock in Company