Question

Carl is evaluating a stock that just paid a dividend of $2.00 per share. He expects this dividend to grow by 4% per year, and he has determined that 11% is the appropriate required return. What is the most he should pay for the stock? Group of answer choices

Answer 1

Answer:

$29.71

Explanation:

Value of Stock can be determine by Dividend Valuation method.

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is determined by calculating present value of future dividend payment.

In this question the Dividend payment is $2, growth rate is 4% and required rate of return is 11%.

Formula for Valuation:

Value of Share = Dividend (1 + g) / (Rate of return - Growth rate)

Value of Share = $2.00 (1 + 4%) / (11% - 4%)

Value of Share = $2.00 (1.04) / 7%

Value of Share = $29.71