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If a stock's dividend is expected to grow at a constant rate of eight percent in the future and it has just paid a dividend of $1.25 a share, and you have an alternative investment of equal risk that will earn a 12 percent rate of return, what would you be willing to pay per share for this stock?
a. $31.25
b. $1.40
c. $1.25
d. $1.12

Respuesta :

TomShelby

Answer:

Value = 31.25

Explanation:

we use the gordon dividend growth model to solve for the share price:

[tex]\frac{divends_1}{return-growth} = Intrinsic \: Value[/tex]

d = 1.25

r= .12

g = 0.08

[tex]\frac{1.25}{.12-.08} = Intrinsic \: Value[/tex]

Value = 31.25

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