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    Given dividend and growth rate, what is market price of stock? Sharon Smith's annuity

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    1. An issue of common stock has just paid a dividend of $3.75. Its growth rate is 8%. What is its price if the market's rate of return is 16%? (Show all work/calculations/formulas)

    2. Sharon Smith will receive $1 million in 50 years. The discount rate is 14. As an alternative, she can receive $2,000 today. Which should she choose? Provide two solutions for this question. (Base your answer on present value calculations for the $1 million, and future value calculations for the $2,000. Use the tables in the back of your text, and show all work/calculations/formulas).

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    Solution Preview

    Question 1:
    Value of stock = $3.75*(1+8%)/(16%-8%) = $50.625

    Question 2:
    Future value of $2,000 = ...

    Solution Summary

    Given dividend and growth rate, the solution determines the market price of stock.

    $2.19