Asked by Parker Elliott on May 27, 2024
Verified
Canada Inc.pays an annual dividend of $50 per share.If your required rate of return on an equity investment is 15%,and Canada Inc.'s expected growth rate is 1%,what should be Canada Inc.'s price?
A) $1.50
B) $3.61
C) $12.00
D) $17.00
Required Rate
The minimum acceptable return on an investment, often used in capital budgeting and investment analysis.
Expected Growth Rate
The anticipated rate at which a company, investment, or value of an asset is expected to grow over a specified period.
Annual Dividend
The total dividend payment a company distributes to its shareholders in a year, often quoted per share.
- Employ the Gordon Growth Model to determine the price of a stock by analyzing its dividend growth.
Verified Answer
JB
Jimmy Bhavsar RealtorMay 31, 2024
Final Answer :
B
Explanation :
We can use the constant growth model to calculate the price of the stock:
Price = Dividend / (Required rate of return - Expected growth rate)
Price = 50 / (0.15 - 0.01) = $361
Therefore, the correct answer is B.
Price = Dividend / (Required rate of return - Expected growth rate)
Price = 50 / (0.15 - 0.01) = $361
Therefore, the correct answer is B.
Learning Objectives
- Employ the Gordon Growth Model to determine the price of a stock by analyzing its dividend growth.