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23 November, 14:49

You are interested in buying a share of stock in LMU Company. You expect a dividend payment of $10 next year and that the dividend will grow by 6% per year thereafter. You desire a 8% return on your purchase. According to the Gordon growth model, what is the maximum price you would pay for a share of this stock?

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  1. 23 November, 16:26
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    The correct answer is $500.

    Explanation:

    According to the scenario, the computation of the given data are as follows:

    Dividend = $10

    Growth rate = 6%

    Rate of return = 8%

    So, we can calculate the Maximum price of the stock by using following formula:

    Price of stock = Dividend : (Rate of return - Growth rate)

    By putting the value,

    Price of stock = $10 : (8% - 6%)

    = $10 : 0.02

    = $500.
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