Johnson Company just paid an annual dividend of $1.75.The next dividend will be paid one year from today.Johnson Company expects a constant growth of 5% in dividends forever.The required rate of return for this company's common stock is 13%.What is the value of one share of common stock?

Question

Quizplus · Accepted Answer

The value 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 ($1.75 * 1.05 = $1.8375), r is the required rate of return (0.13), and g is the growth rate (0.05). P = $1.8375 / (0.13 - 0.05) = $22.97.

Johnson Company Just Paid an Annual Dividend of $1