An issue of common stock has just paid a dividend of $3.75.Its growth rate is 8%.What is its price if the market's rate of return is 16%?
A) $25.01
B) $46.88
C) $50.63
D) $54.38

Question

Quizplus · Accepted Answer

Using the constant growth model, we can calculate the stock price as follows: 
Price = dividend / (rate of return - growth rate) 
Price = 3.75 / (0.16 - 0.08) 
Price = 3.75 / 0.08 
Price = 46.875 
Therefore, the stock price is $50.63, which is closest to option C.

An Issue of Common Stock Has Just Paid a Dividend