Question

EBook Problem 11-01: The dividend-growth model may be used to value a stock. Round your answers to the nearest cent. What is the value of a stock if D0 is $2.50, the required rate of return is 8%, and the dividend is expected to grow at a rate of 5%?

a) $31.25
b) $35.71
c) $40.00
d) $42.11

Answer 1

The value of the stock can be calculated using the dividend-growth model, which takes into account the current dividend, the growth rate of the dividend, and the required rate of return. In this case, the value of the stock is $35.71.

Step-by-step explanation:

The dividend-growth model is used to value a stock based on its future dividends. To calculate the value of the stock, we use the formula:

Value of Stock = D0 * (1 + g) / (r - g)

Where:

• D0 is the dividend at time 0, which is $2.50 in this case
• g is the constant growth rate of the dividend, which is 5%
• r is the required rate of return, which is 8%

Plugging in the values, we get:

Value of Stock = $2.50 * (1 + 0.05) / (0.08 - 0.05)

Value of Stock = $35.71

Therefore, the value of the stock is $35.71.