Question

According to the Gordon growth model, what is an investor's valuation of a stock whose last dividend was $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 16 percent?

Answer 1

The investor valuation of a stock is $18.33

Step-by-step explanation:

Gordon Growth model : The formula to compute investor valuation of stock is shown below:

= Dividend of year 1 ÷ (Required rate - growth rate)

where,

year 1 dividend = year 0 dividend × (1 + growth rate)

= $1 × (1 + 0.10)

=$1.10

Required rate of return = 16%

And, growth rate = 10%

Now apply the above formula which is equals to

= $1.10 ÷ (16% - 10%)

= $18.33

Hence, The investor valuation of a stock is $18.33