Question

Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 12% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.a. will be higher than the intrinsic value of stock Bb. will be the same as the intrinsic value of stock Bc. will be less than the intrinsic value of stock B

Answer 1

Answer:

B

Explanation:

Intrinsic value of the stock using the constant growth DDM model = D1 / r - g

D1 = dividend in the following year

r = required return

g = growth rate

Since the growth rate and required rate and growth rate of both stocks are the same, the intrinsic value of both stocks would be equal to :

$7 / 0.12 - .06 = $116.7