last dividend paid by Wilden Corporation was $1.55 The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever The firm's required return (rs) is 12.0% What is the best estimate of the current stock price?

Question

Quizplus · Accepted Answer

The correct answer is A because the current stock price is $37.05. This is calculated using the Gordon Growth Model, which is:P0 = D1 / (rs - g)where:P0 is the current stock priceD1 is the dividend expected to be paid in one yearrs is the required returng is the dividend growth rateIn this case, the last dividend paid was $1.55, the dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever, and the firm's required return is 12.0%. Plugging these values into the Gordon Growth Model, we get:P0 = 1.55 * (1 + 0.015)^2 / (0.12 - 0.08)= 1.55 * 1.030225 / 0.04= $37.05

Last Dividend Paid by Wilden Corporation Was $1