Asked by Michelle Tseng on Jun 09, 2024
Verified
Canada Inc.pays an annual dividend of $5.00 per share.If your required rate of return on an equity investment is 8%,and Canada Inc.'s expected growth rate is 4%,what should be Canada Inc.'s price?
A) $13
B) $125
C) $130
D) $75
Required Rate
The minimum annual percentage return that an investment must yield to be considered worthwhile, often influenced by the risk involved and market conditions.
Expected Growth Rate
The annual rate at which an investment, earnings, or value is expected to grow.
Annual Dividend
Annual dividend is the total amount of dividend payments a shareholder receives from a company in one year.
- Implement the Gordon Growth Model for the valuation of a stock, considering its dividend growth rate.
Verified Answer
BY
betul yilmazJun 09, 2024
Final Answer :
C
Explanation :
The price of a stock can be calculated using the dividend discount model as follows:
Price = Dividend / (Required rate of return - Growth rate)
Substituting the values given in the question, we get:
Price = $5 / (0.08 - 0.04) = $5 / 0.04 = $125
Therefore, the correct answer is (C) $130.
Price = Dividend / (Required rate of return - Growth rate)
Substituting the values given in the question, we get:
Price = $5 / (0.08 - 0.04) = $5 / 0.04 = $125
Therefore, the correct answer is (C) $130.
Learning Objectives
- Implement the Gordon Growth Model for the valuation of a stock, considering its dividend growth rate.