A Stock Offers an Expected Dividend of $3

question 40

Essay

A stock offers an expected dividend of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%. Its current price is $35.00 and shows no tendency to change. How can you explain this price based on the constant-growth dividend discount model?

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Definitions:

Zero-coupon Bond

A debt security that does not pay interest but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its face value.

Semi-annually

Occurring twice a year.

Effective Annual Yield

Annualized interest rate on a security computed using compound interest techniques.

Yield Curve

A graph that shows the relationship between the interest rates and the maturity dates of debt securities issued by the same issuer.