Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and these dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 18%, what is current value of the stock today?
A) $25
B) $50
C) $100
D) $54

Question

Quizplus · Accepted Answer

The correct answer is A because the current value of the stock is $25. This can be calculated using the formula:Current Value = D1 / (r - g)where:D1 is the dividend at the end of year-1r is the required rate of returng is the constant growth rateIn this case, D1 = $3, r = 18%, and g = 6%. Plugging these values into the formula, we get:Current Value = $3 / (0.18 - 0.06) = $25