Question

A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for this stock is 5 percent, and if investors require an 11 percent rate of return, what is the price of the stock? Select one: a. $50.00 b. $50.50 c. $52.50 d. $53.00 e. $63.00

Answer 1

option C

Explanation:

given,

share of common stock paid dividend of $3.00

for expected growth rate of 5 %

investor requirement of return is 11 %

price of the stock = ?

Next year dividend = last year dividend × (1 + growth rate)

= 3 × ( 1 + 0.05)

= 3.15

Current price = next year dividend / (required return -long term growth rate)

=
`(3.15)/(0.11 - 0.05)`

= $ 52.5

the price of the stock should be equal to $ 52.5.

hence, the correct answer will be option C