If the marginal product of capital is 3 percent, the real interest rate is 4 percent, growth is 2.5 percent, and the capital depreciation rate is 10 percent, what is the equilibrium stock price?

Question

Quizplus · Accepted Answer

The equilibrium stock price can be calculated using the Gordon Growth Model (Dividend Discount Model) where the price is the dividend divided by the difference between the required rate of return and the growth rate. Here, the dividend is the marginal product of capital (3%), the required rate of return is the real interest rate plus depreciation (4% + 10% = 14%), and the growth rate is 2.5%. Thus, the price is 0.03 / (0.14 - 0.025) = $166.67.

If the Marginal Product of Capital Is 3 Percent, the Real