What is the current value of a share of ABC common stock if its current dividend is $1.50 and dividends are expected to grow at the annual compound growth rate of 20 percent into the foreseeable future? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years.
A) $56.87
B) $30.00
C) $25.00
D) The constant growth rate model cannot be used because the growth rate is greater than the required rate of return.

Question

Quizplus · Accepted Answer

The constant growth rate model (Gordon Growth Model) cannot be used when the growth rate exceeds the required rate of return, as it would result in a negative denominator in the formula, making the valuation invalid.

What Is the Current Value of a Share of ABC