You are considering the purchase of XYZ Company's common stock which will pay a $1.00 per share dividend one year from the date of purchase. The dividend is expected to grow at the rate of 4% per year. If the appropriate discount rate for this investment is 14%, what is the price of one share of this stock?
A) $7.14
B) $10.00
C) $25.00
D) Cannot be determined without maturity date

Question

Quizplus · Accepted Answer

Using the dividend discount model, the price of the stock can be calculated as follows:

Price = Dividend / (Discount rate - Growth rate) 
Price = $1.00 / (14% - 4%) 
Price = $1.00 / 10% 
Price = $10.00

Therefore, the price of one share of this stock is $10.00, which is option B.

You Are Considering the Purchase of XYZ Company's Common Stock