If a stock's dividend is expected to grow at a constant rate of 4 percent in the future and it has just paid a dividend of $6.00 per share,and you have an alternative investment of equal risk that will earn a 7 percent rate of return,what would you be willing to pay per share for this stock?
A)$6.66
B)$54.55
C)$200.00
D)$208.00

Question

Quizplus · Accepted Answer

To calculate the price per share for this stock, we can use the constant growth dividend formula: 
Price = (Dividend*(1+Growth Rate))/(Return Rate - Growth Rate)

Substituting the values, we get:
Price = ($6.00*(1+0.04))/(0.07-0.04) 
Price = $208.00

Therefore, the stock is worth $208 per share if its dividend is expected to grow at a constant rate of 4 percent in the future and an alternative investment of equal risk will earn a 7 percent rate of return. Option D is the correct answer.

If a Stock's Dividend Is Expected to Grow at a Constant