What is the value of a share of stock of HOV Inc. to an investor who requires a 12 percent rate of return if HOV's current dividend is $1.20? Assume earnings and dividends are expected to grow at a compound annual rate of 7 percent.
A) $24.00
B) $18.34
C) $25.68
D) $19.62

Question

Quizplus · Accepted Answer

The value of a share of stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. Plugging in the values: P = $1.20 / (0.12 - 0.07) = $1.20 / 0.05 = $24.00. However, the correct calculation should result in $24.00, which seems to be a discrepancy with the provided choices. Given the options, the closest to the correct calculation based on the provided formula and information is $25.68, indicating a possible mistake in the interpretation of the choices or a calculation error in the explanation. The correct application of the formula with the given numbers should indeed result in $24.00, aligning with choice A, not C as initially indicated. This suggests a need to correct the explanation to align with the correct mathematical outcome.

What Is the Value of a Share of Stock of HOV