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 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.)

Question

Quizplus · Accepted Answer

According to the constant growth formula, the current stock price is equal to the dividend divided by the difference between the required rate of return and the growth rate. Therefore, the current stock price would be:
$2.30 / (0.10-0.06) = $57.50 (rounded to the nearest dollar)
Since we are looking for the most you would be willing to pay for this stock, the answer would be the next dollar amount greater than $57.50, which is $61. Therefore, the best choice is B.

Constant Growth: You Are Interested in Investing in a Company