Final answer:
The calculation provided applies the Gordon Growth Model to find the price of a stock based on expected dividends, required rate of return, and dividend growth rate. The correct price of the stock with the provided figures is 13.64.
Step-by-step explanation:
It looks like the formula given is derived from the Gordon Growth Model (GGM), which is used in finance to determine the present value of a series of dividends that grow at a constant rate. The formula for the GGM is P = D / (r - g), where:
- P is the price of the stock.
- D is the expected dividend per share one year from now.
- r is the required rate of return for equity investors.
- g is the growth rate in dividends.
Given bi as the dividend (D in the formula), rs as the required rate of return, and g as the growth rate, the calculation should be P = D / (r - g). If we plug the numbers into the formula, we get:
P = 0.75 / (0.105 - 0.05) = 13.64
This calculation shows that the price of the stock, or P, is equal to 13.64 when the dividend is 0.75, the required rate of return is 10.5%, and the growth rate is 5%. It seems there is a mistake in the original notation with 'A - Pc', which isn't part of the standard GGM equation and has likely been used in error. The rest of the information provided in the question appears to be unrelated to the core calculation of the GGM.