If the marginal product of capital is 3 percent, the real interest rate is 4 percent, growth is 2.5 percent, and the capital depreciation rate is 10 percent, what is the equilibrium stock price?

Question

Quizplus · Accepted Answer

The equilibrium stock price can be calculated using the Gordon Growth Model or a similar valuation model that accounts for the marginal product of capital, growth, and depreciation. In this case, the net return on capital is the marginal product of capital (3%) minus the depreciation rate (10%), which gives a negative value, indicating the formula might not directly apply. However, considering the context of equilibrium stock price calculation, a more fitting approach involves considering the real interest rate and growth. The formula for the equilibrium stock price in a simplified model considering growth and real interest rate is P = E / (r - g), where E is earnings, r is the real interest rate, and g is growth. Assuming earnings are equivalent to the marginal product of capital and adjusting for depreciation and growth, the calculation does not directly align with the given options without specific earnings data. However, the closest match to a standard interpretation would involve considering the net benefits or returns to capital, suggesting a need for clarification or a different approach to match the given options. Given the information and typical financial formulas, none of the options directly correlate without additional assumptions about earnings or capital allocation. Thus, the response indicates a need for a more detailed formula or additional information to accurately select from the provided choices.

If the Marginal Product of Capital Is 3 Percent, the Real