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NEW QUESTION: 1
You have invested in a stock that has a dividend growth rate of 4%. It is expected to pay a dividend of $4 per share next year. You expect to sell the stock after 3 years, for a capital gain of about $6 per share. If your required rate of return is 8%, what price would you be ready to pay for the stock?
A. $75.04
B. $14.18
C. $18.98
D. $15.47
Answer: A
Explanation:
Explanation/Reference:
Explanation:
Be careful about the fact that $6 represents the capital gain on the stock, not the selling price. If you buy the stock for a price, P, then the problem has in effect told you that the cash flows from the stock are expected to be: $4 next year, $4 * 1.04 = $4.16 in year 2 and (P + $6 + $4 * 1.04