Question

You are interested in buying a share of stock in CAD Corporation. You expect a dividend payment of $0.50 next year and that the dividend will grow by 5% per year thereafter. You desire a 10% return on your purchase. According to the Gordon growth model, what is the maximum price you would pay for a share of this stock?​a. ​$20.00b. ​$15.00c. ​$12.50d. $10.00

Answer 1

Answer: d. $10.00

Step-by-step explanation:

The Gordon Growth Model allows for the valuation of a stock based on its anticipated dividends (which can be determined from it's growth rate if not given) and required return.

The formula is;

Stock Price = Next Dividend / ( required return - growth rate)

= 0.50 / ( 10% - 5%)

= 0.50 / 5%

= $10