An issue of common stock is expected to pay a dividend of $4.80 at the end of the year.Its growth rate is equal to 8%.If the required rate of return is 13%,what is its current price?
A) $103.68
B) $36.92
C) $96.00
D) $48.00

Question

Quizplus · Accepted Answer

We can use the formula for the present value of a growing perpetuity to calculate the current price of the stock:

PV = D / (r - g)

where PV is the present value, D is the dividend at the end of the year, r is the required rate of return, and g is the growth rate.

Substituting the given values, we get:

PV = $4.80 / (0.13 - 0.08) = $96

Therefore, the current price of the stock is $96, which corresponds to choice C.

An Issue of Common Stock Is Expected to Pay a Dividend