Coca-Cola recently paid a $3.00 dividend. Investors expect a 12 percent return on this stock. What is the percentage change in price if Coca-Cola is expected to grow at 7 percent versus 8 percent?

Question

Quizplus · Accepted Answer

The percentage change in price can be calculated using the Gordon Growth Model (Dividend Discount Model). The 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. Calculate the price for both growth rates (7% and 8%) and find the percentage change. For 7% growth, P = 3 / (0.12 - 0.07) = $60. For 8% growth, P = 3 / (0.12 - 0.08) = $75. The percentage change is ((75 - 60) / 60) * 100% = 25%, which is closest to option D (26.17 percent).

Coca-Cola Recently Paid a $3