Sharbaugh Inc.'s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4% per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what should the stock sell for today?

Question

Quizplus · Accepted Answer

The price of a stock (P) is determined by the formula:
P = D/(r-g), where D is the dividend, r is the required rate of return, and g is the growth rate of the dividend.
In this problem, D = $2.00, g = 4%, and r = 13%.

So, 
P=$2.00/(0.13-0.04) = $23.11

Therefore, the stock should sell for $23.11 today.