If a stock's present dividend is $2.00 and it is expected to grow at a constant annual rate of 6% with a market- return of 12%, the selling price of the stock today is $33.33.

Question

Quizplus · Accepted Answer

The selling price of the stock today is calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return (market return in this case), and g is the growth rate. Plugging in the values: P = $2.00 / (0.12 - 0.06) = $2.00 / 0.06 = $33.33. However, the correct calculation should result in $33.33, indicating a misunderstanding in the explanation. The correct explanation should acknowledge that the calculation actually supports the statement, but the initial assertion of "False" was incorrect based on the provided rationale. The correct stance, based on the calculation provided, would align with affirming the statement, thus the explanation contradicts the initial false claim by accurately calculating the price as $33.33, which was the outcome to be disproved.

If a Stock's Present Dividend Is $2