Pulford Corporation's next dividend and stock price are expected to be $4 and $20 respectively. If the investor's rate of return is 10%, determine the stock price now.

Question

Quizplus · Accepted Answer

The stock price now can be calculated using the dividend discount model (DDM) formula for a zero growth stock, which is P0 = D / (r - g). Since the dividend is not expected to grow (g = 0), the formula simplifies to P0 = D / r. Plugging in the values: P0 = $4 / 0.10 = $40. However, the correct calculation involves considering the expected stock price and the dividend, so the correct formula to use in this context is P0 = (D1 + P1) / (1 + r), where D1 is the next dividend, P1 is the expected stock price, and r is the rate of return. Therefore, P0 = ($4 + $20) / (1 + 0.10) = $24 / 1.10 = $21.82.

Pulford Corporation's Next Dividend and Stock Price Are Expected to Be