Question

JWU Company has been growing at a rate of 5% for the past two years and is expected to continue for several years. The company paid a Dividend of $2.00 last year. If your required rate of return is 13%, what is the current value of this company’s stock?

A. $26.25
B. $15.38
C. $40.00
D. $29.50

Answer 1

Answer: A. $26.25

Step-by-step explanation:

Using the Gordon Growth model, the value of the stock can be determined using the available variables.

The formula is;

Value of a Stock = Next Dividend / (Required Return - Growth Rate)

Value of a Stock = Current Dividend (1 + Growth Rate) / (Required Return - Growth Rate)

= 2 ( 1 + 0.05) / ( 0.13 - 0.05)

= (2 * 1.05) / 0.08

= $26.25