Matt's Carpentry Services Inc.has just paid a dividend of $0.55 per share.The dividends are expected to grow at an annual rate of 5 percent indefinitely.What is today's stock price if the required return is 12.5 percent?

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Quizplus · Accepted Answer

The stock price can be calculated using the Gordon Growth Model: P = D1 / (r - g), where D1 is the next year's expected dividend ($0.55 * 1.05), r is the required return (12.5% or 0.125), and g is the growth rate (5% or 0.05). This gives P = $0.5775 / (0.125 - 0.05) = $7.70.