Blue Water Tours just paid an annual dividend of $.80 a share. The firm has a policy of increasing the dividend by 3.5 percent annually. What is the current value of this stock at a discount rate of 11.5 percent?

Question

Quizplus · Accepted Answer

The value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a constantly growing dividend), which is given by $ P_0 = \frac{D_0 \times (1 + g)}{r - g} $, where $ P_0 $ is the current stock price, $ D_0 $ is the most recent dividend payment, $ g $ is the growth rate of the dividend, and $ r $ is the required rate of return (discount rate). Plugging in the values: $ P_0 = \frac{0.80 \times (1 + 0.035)}{0.115 - 0.035} = \frac{0.80 \times 1.035}{0.08} = \frac{0.828}{0.08} = 10.35 $.

Blue Water Tours Just Paid an Annual Dividend of