How much are you willing to pay for one share of Delphia stock if the company just paid a $1.34 annual dividend, the dividends increase by 2.8% annually, and you require a 14% rate of return?

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the dividend next year, r is the required rate of return, and g is the growth rate. D1 = $1.34 * (1 + 0.028) = $1.37752. P = $1.37752 / (0.14 - 0.028) = $12.30.

How Much Are You Willing to Pay for One Share