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How much should you pay for a share of stock that offers a constant growth rate...

How much should you pay for a share of stock that offers a constant growth rate of 13%, requires a 18% rate of return, and is expected to sell for $50 one year from now

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Answer #1

Price at year1 =Dividend 2/(Rs -g)

50 = D2/(.18-.13)

50 =D2 /.05

D2 =50*.05 = 2.5

D2=D1/(1+g)

2.5 =D1(1+.13)

2.5/1.13 = D1

D1 = 2.21239

Price to be paid today =D1/(Rs-g)

               = 2.21239 /(.18-.13)

             = 2.21239/.05

              = $ 44.25 per share

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