A FIRM JUST PAID A DIVIDEND OF $1.2. BASED ON YOUR ASSESSMENT OF T...

27. A firm just paid a dividend of $1.2. Based on your assessment of the riskiness of the common stock, you feel it should pay a return of 20 percent. If the firm's dividends are expected to have a long-term growth rate of 4 percent, what is the market value of the stock? * A. $7.50 B. $6.20 C. $5.00 D. $4.25 E. $9.99 Solution: If you rearrange Equation (19-2) for the market price of equity, you will have: market price = dividend/(cost of equity - annual dividend growth rate) = $1.2/(0.20 - 0.04) = $7.50.