A Share Of Common Stock Has Just Paid A Dividend Of $2.00. If The Expected Long-run Growth Rate For This Stock Is 7%, And If Investors Require A(n) 11% Rate Of Return, What Is The Price Of The Stock?


1 Answers

Anonymous Profile
Anonymous answered
Ok, I'll take a stab at this one.  If the investors are expecting an 11% ROR annually and if the stock were to appreciate linearly (unlikely) at 7% a year then the difference would have to made up of the dividend.  Thus 11%-7%=$2 assuming (and you know what that means) that the recent dividend is paid our annually.  So, $2=4% of the stock price and the stock price is $2x100%/4%=$2x25=$50.  Of course after today the stock has fallen almost in half or has become totally worthless, one or the other....

Answer Question