Constant growth: You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future. The company paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this share? (Round to the nearest dollar.)
A) $58
B) $61
C) $23
D) $24

Question

Quizplus · Accepted Answer

According to the constant growth model, the present value of a stock is calculated as (dividend of next year) / (required rate of return - growth rate). 
Using this formula, we get: 
Present value = $2.30 * (1 + 0.06) / (0.10 - 0.06) = $61 
Therefore, the most you should be willing to pay for this share is $61, which is option B.

Constant Growth: You Are Interested in Investing in a Company