You wish to earn a return of 12% on each of two stocks,A and B.Each of the stocks is expected to pay a dividend of $2 in the upcoming year.The expected growth rate of dividends is 9% for stock A and 10% for stock B.The intrinsic value of stock A _____.
A)will be greater than the intrinsic value of stock B
B)will be the same as the intrinsic value of stock B
C)will be less than the intrinsic value of stock B
D)A or B
E)none of the above is a correct statement.

Question

Quizplus · Accepted Answer

The intrinsic value of a stock is calculated using the Gordon Growth Model: P = D / (r - g). For stock A, with a growth rate of 9%, the intrinsic value is lower compared to stock B, which has a higher growth rate of 10%, given the same required return of 12%.

You Wish to Earn a Return of 12% on Each