Final answer:
Using the Gordon Growth Model, the current value of World-Tour Co. stock after paying the dividend is calculated to be $30, which aligns with option (a) provided in the question.
Step-by-step explanation:
The student is asking about the current value of World-Tour Co. stock based on its dividend growth model. To find the value of the stock, we use the Gordon Growth Model (also known as the dividend discount model), which determines the present value of an infinite series of future dividends that grow at a constant rate. According to the model, the formula to calculate the current stock price P0 is given by:
P0 = D1 / (k - gWhereD1 is the dividend expected at the end of the first year, which for World-Tour Co. is Div0 multiplied by (1 +growth rate)k is the required rate of return on the stock, ang is the constant growth rate of dividends.The calculation is:D1 = $2.83 * (1 + 0.06) = $3.00P0 = $3.00 / (0.16 - 0.06) = $3.00 / 0.10 = $3Therefore, the current value of World-Tour Co. stock is $30 after paying the dividend, which corresponds to optio(a).To calculate the current value of the stock, we will use the dividend discount model (DDM) formula. The DDM formula is:Stock Price = Div0 / (Required Rate of Return - Dividend Growth RateIn this case, the required rate of return is 16 percent and the dividend growth rate is 6 percent. The Div0, which is the dividend just paid, is $2.83 per share. Plugging these values into the formula, we get:Stock Price = $2.83 / (0.16 - 0.06) = $2.83 / 0.1 = $28.3Therefore, the current value of the stock, after paying the dividend, is approximately $28.3.