Final answer:
Using the dividend discount model with a growth rate of 4% and a required rate of return of 7%, the price of the common share is calculated as $65.87.
Step-by-step explanation:
To find the current share price using the dividend discount model (DDM) for a stock with dividends that grow at a constant rate, the following formula is used: Price = D₁ / (rₛ - g)
Where D₁ is the dividend expected at the end of the first year, rₛ is the required rate of return, and g is the growth rate of the dividend. Since the current dividend (D₀) is $1.90 and is expected to grow at a constant 4%, D₁ would be $1.90 multiplied by 1.04 (which equals $1.976). The required rate of return is 7%. Using these figures:
Price = $1.976 / (0.07 - 0.04) = $1.976 / 0.03 = $65.87. Therefore, the correct answer is b. $65.87. The price for the common share, as calculated using the DDM, reflects the present value of expected future dividends, discounted at the required rate of return, accounting for the constant growth rate.