Question

What is the price of a stock if its dividend a year from now is expected to be $3.20, the discount rate is 9 percent, and the constant rate of growth is 5 percent? Click the answer you think is right.

a-$85
b-$80
c-$78
d-$83.50

Answer 1

The correct answer is option b. The price of the stock, calculated using the present discounted value method with a $3.20 expected dividend, a 9% discount rate, and a 5% growth rate, is $80.

Step-by-step explanation:

To calculate the price of a stock using the present discounted value (PDV), we need to consider the expected future dividend payment, the discount rate, and the constant rate of growth. In this case, the dividend a year from now is expected to be $3.20, the discount rate is 9 percent, and the constant rate of growth is 5 percent. The formula used to calculate the price of a stock in this scenario is:

Price = Dividend / (Discount Rate - Growth Rate)

Using the given values, we can calculate the price as follows:

Price = $3.20 / (0.09 - 0.05)

Price = $3.20 / 0.04

Price = $80

Therefore, the price of the stock would be $80.