Constant growth: A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the share three years from now?
A) $58.31
B) $46.29
C) $51.02
D) $42.83

Question

Quizplus · Accepted Answer

The correct answer is A because the price of the share three years from now is $58.31. This is calculated using the constant growth model, which is:P = D / (r - g)where:P is the price of the shareD is the dividendr is the required rate of returng is the growth rateIn this case, the dividend is $3.00, the required rate of return is 15%, and the growth rate is 8%. Plugging these values into the formula, we get:P = 3 / (0.15 - 0.08) = $58.31

Constant Growth: a Company Is Growing at a Constant Rate