How Much Should You Pay for a Share of Stock

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

Correct Answer:

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