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 firm 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 stock? (Round to the nearest dollar.)
A) $58
B) $61
C) $23
D) $24

Question

Quizplus · Accepted Answer

To calculate the stock price, we can use the dividend discount model: 
Stock Price = Dividend / (Required Rate of Return - Growth Rate) 
Stock Price = $2.30 / (0.10 - 0.06) 
Stock Price = $57.50 
The most you would be willing to pay for the stock is rounded to the nearest dollar, which is $61. Therefore, the best choice is B.

You Are Interested in Investing in a Company That Expects