A stock expects to pay a dividend of $5.73 per share one year from today. The dividend is expected to grow at a constant rate of 4.6 percent per year indefinitely. The expected return of the stock is 14 percent. What should one share of the stock sell for today, if the stock is priced correctly?
Group of answer choices

$60.96

$63.76

$57.29

$55.81

$71.08

To find the correct price of the stock today, we can use the **Dividend Discount Model (DDM)** for a stock with constant growth. The formula for calculating the price of a stock is:

\[
P_0 = \frac{D_1}{r - g}
\]

Where:
- $P_0$ is the current price of the stock,
- $D_1$ is the dividend expected one year from today,
- $r$ is the required rate of return (or expected return),
- $g$ is the constant growth rate of the dividend.

### Given values:
- $D_1 = 5.73$ (dividend one year from today),
- $r = 14\% = 0.14$ (expected return),
- $g = 4.6\% = 0.046$ (dividend growth rate).

Now, we substitute the given values into the formula:

\[
P_0 = \frac{5.73}{0.14 - 0.046}
\]

Let me calculate this for you.The stock's price today, if priced correctly, should be approximately **$60.96**.

The correct answer is:

**$60.96**.

Do you want more details or have any questions?

Here are 5 related questions to explore:
1. How would the stock price change if the dividend growth rate increased to 5%?
2. What happens to the stock price if the required rate of return drops to 12%?
3. How do dividend discount models apply to companies with variable growth rates?
4. What is the impact of the dividend payout ratio on the stock price?
5. How does inflation affect the required return and the stock price?

**Tip:** In a constant growth model, small changes in the growth rate or required return can significantly impact the stock's price.

A stock expects to pay a dividend of $5.73 per share one year from today. The dividend is expected to grow at a constant rate of 4.6 percent per year indefinitely. The expected return of the stock is 14 percent. What should one share of the stock sell for today, if the stock is priced correctly?

Learn how to use the Dividend Discount Model (DDM) to calculate the price of a stock today. This example demonstrates how to find the stock price based on future dividends, growth rate, and expected return. Suitable for students in Grades 11-12 studying financial mathematics.

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