API has just paid an annual dividend of $1.39 per share and expects to increase it by 3.5 percent annually for the foreseeable future. Calculate the current value of API's common stock given a discount rate of 6 percent.
A)$55.60
B)$56.30
C)$57.55
D)$58.34
E)$58.50

Question

Quizplus · Accepted Answer

To calculate the current value of the stock, we can use the dividend discount model:
Current stock value = D / (r - g)
Where:
D = Annual dividend per share = $1.39
r = Discount rate = 6%
g = Expected annual growth rate of dividends = 3.5%
Plugging in the values:
Current stock value = 1.39 / (0.06 - 0.035) = $57.55
Therefore, the correct answer is C.

API Has Just Paid an Annual Dividend of $1