Question

If the required return on a Pepsi stock is 9% and if the expected constant growth rate of dividends is 6%, then according to the Gordon growth model, what is the value of the Pepsi stock that will pay a dividend of $0.47 next year?

Answer 1

Using the Gordon growth model, the value of a Pepsi stock expected to pay a $0.47 dividend next year with a required return of 9% and a growth rate of 6% is $15.67 per share.

Step-by-step explanation:

The student is asking how to calculate the value of a stock using the Gordon growth model. The model is given by the formula P = D / (k - g), where P is the stock price, D is the expected dividend next year, k is the required rate of return, and g is the dividend growth rate. In this case, for a Pepsi stock that is expected to pay a dividend of $0.47 next year, with a required return of 9% and an expected constant growth rate of 6%, the calculation would be P = $0.47 / (0.09 - 0.06). This simplifies to P = $0.47 / 0.03, which equals $15.67 per share. Thus, according to the Gordon growth model, the value of the Pepsi stock is $15.67 per share.