Constant growth: A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now?

Question

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The correct answer is A because the price of the stock three years from now is $58.31. This is calculated using the constant growth model, which states that the price of a stock is equal to the present value of its future dividends. In this case, the company is growing at a constant rate of 8 percent, and the required rate of return is 15 percent. The present value of the future dividends is calculated as follows:PV = D / (r - g)where:PV is the present valueD is the dividendr is the required rate of returng is the growth rateIn this case, the dividend is $3.00, the required rate of return is 15 percent, and the growth rate is 8 percent. Plugging these values into the formula, we get:PV = $3.00 / (0.15 - 0.08)= $58.31Therefore, the price of the stock three years from now is $58.31.

Constant Growth: a Company Is Growing at a Constant Rate