Question

Header Motor, Inc., paid a $3.74 dividend last year. At a constant growth rate of 6 percent, what is the value of the common stock if the investors require a 16 percent rate of return? The value of the common stock is $.(Round to the nearest cent.)

Answer 1

To find the value of Header Motor, Inc.'s common stock with a $3.74 dividend and a 6% growth rate given a 16% required rate of return, use the Gordon Growth Model formula P = D1 / (r - g). The calculated stock value is $39.64.

Step-by-step explanation:

The question involves calculating the value of common stock with the given dividend and growth rate, using the Gordon Growth Model (also known as the dividend discount model). To find the stock value, one must use the formula P = D1 / (r - g), where P is the price of the stock, D1 is the dividend next year, r is the required rate of return, and g is the growth rate of the dividend.

Considering Header Motor, Inc. paid a $3.74 dividend last year and is expected to grow at a rate of 6% (g), the dividend expected next year (D1) would be $3.74 * (1 + 0.06) = $3.9644. Given the investors require a 16% rate of return (r), we can substitute these values into the formula: P = $3.9644 / (0.16 - 0.06) = $39.644.

Therefore, the value of the common stock is $39.64 after rounding to the nearest cent.