Question

A stock is expected to pay a dividend of $0.65 at the end of the year. the required rate of return is rs = 12.2%, and the expected constant growth rate is g = 8.2%. what is the stock's current price?

a. $5.33
b. $16.25
c. $17.58
d. $18.23
e. $7.93

Answer 1

The current price of the stock can be calculated using the Gordon Growth Model formula. By substituting the given values into the formula, the stock's current price is determined to be $16.25.

Step-by-step explanation:

To calculate the current price of the stock, we can use the Gordon Growth Model formula. The formula is:

Stock Price = Dividend Payment / (Required Rate of Return - Growth Rate)

Using the given values, we have:
Dividend Payment = $0.65
Required Rate of Return = 12.2% = 0.122
Growth Rate = 8.2% = 0.082

Substituting the values into the formula:

Stock Price = $0.65 / (0.122 - 0.082) = $0.65 / 0.04 = $16.25

Therefore, the stock's current price is $16.25, which corresponds to option b.