Last quarter, Tech Inc. paid a dividend of $3 per share. Analysts suggest that the dividend will grow by 5% this year and every year hereafter. If you require a 10% rate of return, what price would you be willing to pay for a share of Tech Inc. stock?

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity with growth): P = D1 / (r - g), where D1 is the dividend next year, r is the required rate of return, and g is the growth rate. D1 = $3 * (1 + 0.05) = $3.15. P = $3.15 / (0.10 - 0.05) = $63.00.

Last Quarter, Tech Inc