The common stock of Big Birds Unlimited has a required return of 8 % and a growth rate of 4 %. The last annual dividend was $.60 a share. What is the current price of this stock?

Question

Quizplus · Accepted Answer

The current price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity) formula: P = D1 / (r - g), where P is the price, D1 is the dividend next year, r is the required return, and g is the growth rate. The dividend next year, D1, can be calculated as the last annual dividend multiplied by (1 + growth rate), which is $0.60 * (1 + 0.04) = $0.624. Plugging the values into the formula gives P = $0.624 / (0.08 - 0.04) = $15.60.

The Common Stock of Big Birds Unlimited Has a Required