Question

Springer, inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 18 percent. the value of a share of springer, inc.'s common stock is_____.

a) $28.00
b) $56.00
c) $70.00
d) $18.67

Answer 1

Using the Gordon Growth Model, the value of a share of Springer, Inc.'s common stock is calculated as $70.00, making option c) the correct answer.

Step-by-step explanation:

The value of a share of Springer, Inc.'s common stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model), which takes into account the expected dividend next year, the growth rate of the dividends, and the required rate of return.

The formula to calculate the price of the stock is P = D / (r - g), where P is the price of the stock, D is the expected dividend, r is the required rate of return, and g is the growth rate. Using the given figures: D = $5.60, r = 18%, and g = 10%, Calculating the price we have P = $5.60 / (0.18 - 0.10) which equals P = $5.60 / 0.08 or P = $70.00. Therefore, the correct option is c) $70.00.