(Q16 IN TYPE B) HOW MUCH OF A STOCK’S $25 PRICE IS REFLECTED IN TH...

16. (Q16 in Type B) How much of a stock’s $25 price is reflected in the PVGO if it expects to earn $3 of earnings per share next year, and has a required rate of return of 14%? A) $3.57. B) $5.00. C) $21.43 D) $22.00 Solution: A If all earnings are paid out as dividends to shareholders, the stock price will be $3.00/0.14 = $21.43. This is the stock price when there is “no growth.” Therefore, the PVGO = $25.00 - $21.43 = $3.57.