# If expected dividends grow at 6% and the appropriate discount rate is 10%, what is the value of a...

## Question:

If expected dividends grow at 6% and the appropriate discount rate is 10%, what is the value of a stock with an expected dividend of $2.75?

a. $68.75

b. $103.12

c. $34.38

d. $69.75

## Dividend growth model:

The dividend growth model assumes that dividends will grow at a constant rate and all the future cash inflows are discounted to know the present value of a stock.

## Answer and Explanation:

We will use the following formula to calculate our answer:

{eq}\displaystyle\text{Value of stock} = \displaystyle\frac{\text{Dividend}}{\text{Rate of return - Growth rate}} {/eq}

{eq}\displaystyle\text{Value of stock} = \displaystyle\frac{\$2.75}{10\% - 6\%} {/eq}

{eq}\displaystyle\text{Value of stock} = \displaystyle\$68.75 {/eq}

#### Ask a question

Our experts can answer your tough homework and study questions.

Ask a question Ask a question#### Search Answers

#### Learn more about this topic:

Get access to this video and our entire Q&A library

#### Related to this Question

Bowie Company has 100,000 shares of common stock...

Crane Company declared a $225000 cash dividend. It...

What is the effect on the accounting equation when...

The shareholders' equity of Miami Corporation...

Kingbird Inc. has 16,000 shares of 8%, $100 par...

Assume beginning and ending total assets of...

York's outstanding stock consists of 80,000 shares...

Jounalize these transactions: Declared a 5% common...

Berman Inc. has 6,000 shares of 6%, $50 par value,...

Alpha Corp., had $15,000 of dividends in arrears...

Pronghorn Inc. owns shares of Stellar Corporation...

The shareholders' equity of Absolut Corporation...

#### Explore our homework questions and answers library

Browse
by subject