Question

A firm just paid an annual dividend of $1.30. The expected annual growth rate of earnings is 5% forever, and the investors’ required rate of return is 9%. What is the value of this stock?

a) $11.57

b) $13.68

c) $15.74

d) $18.06

Answer 1

Using the Gordon Growth Model, a stock with an annual dividend of $1.30, a growth rate of 5%, and a required rate of return of 9% would be valued at $32.50. All of the options are incorrect.

Step-by-step explanation:

The value of a stock can be calculated using the Gordon Growth Model, which takes into account the most recent dividend paid, the constant growth rate of dividends, and the required rate of return. Given an annual dividend of $1.30, a growth rate of 5%, and a required rate of return of 9%, the value of the stock is calculated as follows:

Value of Stock = Dividend per share / (Required rate of return - Growth rate)

So, Value of Stock = $1.30 / (0.09 - 0.05) = $1.30 / 0.04 = $32.50.

Therefore, based on the given options, none of the choices a) $11.57, b) $13.68, c) $15.74, or d) $18.06 accurately reflects the correct stock value calculation.