Question

Worldtour co. has just now paid a dividend of $6 per share (do), the dividends are expected to grow at a constant rate of 5% per year forever. if the required rate of return on the stock is 15%, what is the current value on stock, after paying the dividend?"

Answer 1

The current value of the Worldtour Co. stock after paying the $6 dividend is calculated using the Gordon Growth Model formula P = D / (r - g), which yields a value of $60 per share.

Step-by-step explanation:

The student has asked about calculating the current value of a stock given its dividend payment, growth rate, and required rate of return. To find the current value of the Worldtour Co. stock, one would use the Gordon Growth Model (also known as the Dividend Discount Model). This model is used to calculate the present value of a stock based on its future series of dividends that grows at a constant rate. The formula used is:

P = D / (r - g) where:

• P is the current stock price
• D is the dividend just paid (D0)
• r is the required rate of return
• g is the growth rate of dividends

Given that the dividend just paid (D0) is $6, the required rate of return (r) is 15%, and the dividend growth rate (g) is 5%, we can plug these numbers into the formula to calculate the value:

P = 6 / (0.15 - 0.05)

P = 6 / 0.10 = $60

Thus, the current value of the Worldtour Co. stock, just after paying the $6 dividend, is $60 per share.