Last year,Hansen Delivery paid an annual dividend of $3.20 per share.The company has been reducing the dividends by 10 percent annually.How much are you willing to pay to purchase stock in this company if your required rate of return is 13 percent?
A)$1.92
B)$7.87
C)$12.52
D)$21.16
E)$24.08

Question

Quizplus · Accepted Answer

The stock price can be calculated using the Gordon Growth Model for a declining dividend: P = D1 / (r - g), where D1 is the expected dividend next year ($3.20 * 0.9 = $2.88), r is the required rate of return (0.13), and g is the growth rate (-0.10). Thus, P = $2.88 / (0.13 + 0.10) = $12.52.

Last Year,Hansen Delivery Paid an Annual Dividend of $3