A share of stock has a dividend of D0 = $5. The dividend is expected to grow at a 20 percent annual rate for the next 10 years, then at a 15 percent rate for 10 more years, and then at a long-run normal growth rate of 10 percent forever. If investors require a 10 percent return on this stock, what is its current price?
A) $100.00
B) $ 82.35
C) $195.50
D) $212.62
E) The data given in the problem are internally inconsistent, i.e., the situation described is impossible in that no equilibrium price can be produced.

Question

Quizplus · Accepted Answer

The data given in the problem are internally inconsistent because the required return is equal to the long-run growth rate, making it impossible to calculate an equilibrium price using the dividend discount model.

A Share of Stock Has a Dividend of D0 =