What is the estimated value of a stock with a required rate of return of 12 percent, a projected constant growth rate of dividends of 7 percent and expected dividend of $2.50?

Question

Quizplus · Accepted Answer

According to the constant growth model, the estimated value of a stock with a required rate of return of 12 percent, a projected constant growth rate of dividends of 7 percent and expected dividend of $2.50 can be calculated as follows:   
P = D / (r - g)  
Where,  
P = Estimated value of the stock  
D = Expected dividend = $2.50  
r = Required rate of return = 12% = 0.12  
g = Projected constant growth rate of dividends = 7% = 0.07  
P = $2.50 / (0.12 - 0.07) = $50 / 0.05 = $60  
Therefore, the estimated value of the stock is $60. Option A is correct.

What Is the Estimated Value of a Stock with a Required