Final answer:
The question seeks to determine the current value of a share of stock for The Bell Weather using the dividend growth model, but the provided growth rate exceeds the required rate of return which leads to an inconsistency in this context.
Step-by-step explanation:
The student is asking about the valuation of a share of stock for The Bell Weather, a new firm in a growing industry that is planning to increase its annual dividend by 10 percent each year. The company has just paid an annual dividend of $3.00 per share. To determine the current share value, we must use the dividend growth model (also known as the Gordon Growth Model). This model takes into account the most recent dividend payment, the growth rate of the dividends, and the required rate of return. Assuming the growth rate is 10 percent as indicated, and the required rate of return is 8.40 percent, the formula used is:
Price = Dividend per share / (Required rate of return - Growth rate)
So:
Price = $3.00 / (0.084 - 0.10)
Since the growth rate is greater than the required rate of return, this would indicate an abnormal situation where the model cannot be applied directly due to the mathematical inconsistency it creates. In a realistic setting, the growth rate cannot indefinitely exceed the required rate of return, and if this is a temporary situation, additional stages or adjustments must be incorporated into the model for a valid share price valuation.