Coca-Cola recently paid a $3.00 dividend. Investors expect a 12% return on this stock. What is the difference in price if Coca-Cola is expected to grow at 6% versus 8%?

Question

Quizplus · Accepted Answer

Using the dividend discount model: 
Price = Dividend / (Required return - Growth rate) 
If growth rate is 6%, 
Price = 3 / (0.12-0.06) = $25 
If growth rate is 8%, 
Price = 3 / (0.12-0.08) = $37.50 
The difference in price is $37.50 - $25 = $12.50. Therefore, none of the given options is the correct answer.

Coca-Cola Recently Paid a $3