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The last dividend on Riverhawk Corporation's common stock was $4.00, and the expected constant growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock? $44.00 $38.50 $40.00 $45.69 $50.00

Respuesta :

beritop1089

Answer:

$44.00

Explanation:

Use dividend discount models to answer this question;

Since it has a constant dividend growth rate, use the formula below;

Price(P0) = Div1/ (r-g)

where P0 = current price

Div1 = next year's dividend = Div0 (1+g ) = 4(1.10) = $4.4

r = required rate of return = 20% or 0.20 as a decimal

g = dividend growth rate = 10% or 0.10 as a decimal

P0 = 4.4 / (0.20-0.10)

P0 = 44

Therefore , you should pay $44 for this stock.