How much are you willing to pay for one share of LBM stock if the company just paid an annual dividend of $2.24, the dividends increase by 2.3 percent annually, and you require a return of 14.8 percent?
A) $19.29
B) $19.33
C) $18.33
D) $18.21
E) $17.59

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model: P = D1 / (r - g), where D1 is the expected dividend next year ($2.24 * 1.023), r is the required return (0.148), and g is the growth rate (0.023). This gives P = $18.33.

How Much Are You Willing to Pay for One Share