How Much Should You Pay for a Share of Stock

question 19

Multiple Choice

How much should you pay for a share of stock that offers a constant growth rate of 10 percent, requires a 16 percent rate of return, and is expected to sell for $50 one year from now?

• A)$42.00
• B)$45.00
• C)$45.45
• D)$47.00 The easiest way to solve this problem is to realize:
• Expected return = expected dividend yield + expected capital appreciation Then:
• )16 = .06 + expected capital appreciation
• )10 = expected capital appreciation And
• P₁ = 110% of P_o
• $50)00 = 1.1P_o

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