Question

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is 12.5%, and the expected constant growth rate is g = 8.5%. What is its current price?

Answer 1

The current price of the stock, based on the dividend discount model with a dividend of $0.75, a required rate of return of 12.5%, and a growth rate of 8.5%, is $20.

Step-by-step explanation:

The current price of the stock, given the expected dividend, the required rate of return, and the constant growth rate, can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model). To determine the stock's price, the formula is P = D / (r - g), where P is the price, D is the expected dividend, r is the required rate of return, and g is the growth rate. In this case, the current price P of the stock would be $0.75 / (0.125 - 0.085), which equals $20.