A common stock last paid a dividend of $1.20 and it is expected to grow at 6% for the next 5 years. If your required rate of return is 10%, what is the most you should pay today?

A) $32.71
B) $30.31
C) $40.15
D) $31.80

Question

Maddy Liddle · Accepted Answer

Final Answer : D, Explanation :  The price of the stock today can be calculated using the Gordon Growth Model (Dividend Discount Model). The formula is P = D1 / (r - g), where D1 is the dividend next year, r is the required rate of return, and g is the growth rate. The dividend next year (D1) is $1.20 * (1 + 0.06) = $1.272. Plugging into the formula gives P = $1.272 / (0.10 - 0.06) = $31.80.

A common stock last paid a dividend of $1.20 and it is expected to grow at 6% for the next 5 years. If your required rate of return is 10%, what is the most you should pay today?

A) $32.71
B) $30.31
C) $40.15
D) $31.80

Definitions

Learning Objectives

Learning Objectives

Related questions

A common stock last paid a dividend of $1.20 and it is expected to grow at 6% for the next 5 years. If your required rate of return is 10%, what is the most you should pay today?A) ​$32.71B) ​$30.31C) ​$40.15D) ​$31.80

Definitions

Learning Objectives

Learning Objectives

Related questions

A common stock last paid a dividend of $1.20 and it is expected to grow at 6% for the next 5 years. If your required rate of return is 10%, what is the most you should pay today?

A) $32.71
B) $30.31
C) $40.15
D) $31.80