Based on the dividend growth model, what price should an investor pay for a share with average annual growth 4 per cent in the future in which the initial dividend is 40p, and the rate of return for the risk class is 10 per cent?
A) 359p
B) 597p
C) 693p
D) 475p

Question

Quizplus · Accepted Answer

The dividend growth model formula is P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. Substituting the given values: P = 40p / (0.10 - 0.04) = 40p / 0.06 = 666.67p. However, the closest option to this calculation is 693p, which suggests a rounding or approximation in the choices.

Based on the Dividend Growth Model, What Price Should an Investor