Gadgets Inc.just paid a dividend of $1.55.It expects its earnings and dividends to decline at a rate of 3.0% per year indefinitely.What is the value of the share today if the required return is 12.5%?

Question

Quizplus · Accepted Answer

The value of the share today can be calculated using the Gordon Growth Model (Dividend Discount Model for declining dividends): P = D1 / (r - g), where D1 is the expected dividend next year, r is the required return, and g is the growth rate. Here, D1 = $1.55 * (1 - 0.03) = $1.5035, r = 0.125, and g = -0.03. So, P = $1.5035 / (0.125 + 0.03) = $9.70.