A stock just paid an annual dividend of $2.00, which is expected to remain constant indefinitely. The market return is 14%. The estimated selling price of the stock is:

Question

Quizplus · Accepted Answer

The estimated selling price (P) can be calculated using the Gordon growth model:

P = D/(r-g)

where D is the annual dividend ($2.00), r is the market return (14%), and g is the expected growth rate of the dividend (which is assumed to be zero, since it is expected to remain constant indefinitely).

P = $2.00/(0.14-0) = $14.29

Therefore, the estimated selling price of the stock is $14.29, which is answer choice B.

A Stock Just Paid an Annual Dividend of $2