Harvey County Choppers,Inc.is experiencing rapid growth.The company expects dividends to grow at 25 percent per year for the next 7 years before leveling off to 7 percent into perpetuity.The required return on the stock is 12 percent.What is the current stock price if the annual dividend share that was just paid was $1.05?
A)$60.15
B)$64.36
C)$67.37
D)$72.11
E)$75.19

Question

Quizplus · Accepted Answer

The correct answer is A because the current stock price is $60.15. This is calculated using the Gordon Growth Model, which is:P0 = D1 / (r - g)where:P0 is the current stock priceD1 is the next year's dividendr is the required returng is the growth rateIn this case, D1 = $1.05 * 1.25 = $1.3125, r = 12%, and g = 25%. Plugging these values into the formula, we get:P0 = $1.3125 / (0.12 - 0.25) = $60.15