An issue of common stock's most recent dividend is $1.75. Its growth rate is 5.7%. What is its price if the market's rate of return is 7.7%?
A)$24.63
B)$87.50
C)$92.50
D)None of these options

Question

Quizplus · Accepted Answer

To calculate the price of the stock, we can use the constant growth model: 
P = D/(r-g) 
where P is the price, D is the most recent dividend, r is the market's rate of return, and g is the growth rate. 
Substituting the given values: 
P = 1.75/(0.077-0.057) 
P = 1.75/0.02 
P = $87.50 
Therefore, the correct answer is option C) $92.50.

An Issue of Common Stock's Most Recent Dividend Is $1