Gamma Corp.is expected to pay the following dividends over the next four years: $7.50, $8.25, $15, and $1.80.Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever.If the required return is 14 percent, what is the current share price?

Question

Quizplus · Accepted Answer

The correct answer is A because the current share price is $35.20. This is calculated by using the Gordon Growth Model, which is:P = D / (r - g)where:P = current share priceD = expected dividend in the next yearr = required returng = growth rateIn this case, the expected dividend in the next year is $7.50, the required return is 14%, and the growth rate is 4%. Plugging these values into the formula, we get:P = $7.50 / (0.14 - 0.04) = $35.20