Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. Afterwards, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return on the stock is 14 percent, what is the current share price?

Question

Quizplus · Accepted Answer

The correct answer is A because the current share price is $37.92. This is calculated by using the Gordon Growth Model, which is:P = D / (r - g)where:P = current share priceD = expected dividend in the next yearr = required returng = growth rateIn this case, the expected dividend in the next year is $5, the required return is 14%, and the growth rate is 4%. Plugging these values into the formula, we get:P = $5 / (0.14 - 0.04) = $37.92