A share of stock is expected to pay a $4 dividend next year, and investors have expectations of a12% return. If dividends are expected to grow at 5% per year indefinitely into the future, a share ofstock is worth $57.14.

Question

Quizplus · Accepted Answer

Using the dividend discount model with a 12% required return and a 5% growth rate for dividends, the calculated stock price is indeed $57.14 (Dividend / (Required Return - Growth Rate) = $4 / (0.12 - 0.05) = $57.14).

A Share of Stock Is Expected to Pay a $4