The consensus of investors is that these dividends will increase at a rate of 4 percent per year for the indefinite future, and if the interest rate is 15 percent, then the price of a stock should be $781.81.
A stock may be defined as a type of security that significantly demonstrates the ownership of a fraction of the issuing corporation. It is a general term that typically describes the ownership certificates of any company.
The formula for calculating the price of a stock is as follows:
PV = 86/i-k
where, i = 15 and k = 0.04 (4 percent per year).
= 86/0.15-0.04 = 86/0.11 = 781.81 $.
where PV is the present value of the future payments, i is the interest rate and k is the annual increase.
Therefore, the price of a stock is $781.81.
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The complete question is as follows:
You are considering purchasing stock. The stock is expected to pay a dividend of $86 per share. The consensus of investors is that these dividends will increase at a rate of 4 percent per year for the indefinite future, and the interest rate is 15 percent. The price of the stock should be $ ________.
