Final answer:
Using the Gordon Growth Model formula, the current value of the stock after paying a dividend of $2.83 with a growth rate of 6% and a required return of 16% is $30. The correct answer is option a.
Step-by-step explanation:
To determine the current value of a stock after paying the dividend, given the company has just paid a dividend of $2.83 per share (D0) and the dividends are expected to grow at a constant rate of 6% per year indefinitely, we use the Gordon Growth Model (also known as the Dividend Discount Model).
The formula is
P0 = D1 / (k - g),
where P0 is the current stock price, D1 is the expected dividend next year, k is the required rate of return, and g is the dividend growth rate.
In this case, D1 equates to $2.83 * (1 + 0.06) = $3.00.
Given a required rate of return of 16% and a constant growth rate of 6%, the current value of the stock is
P0 = $3.00 / (0.16 - 0.06) = $30.
Therefore, the correct answer is a. rs.30.