Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The risk of this company suggests that future cash flows should be discounted at a rate of 11%.
A) $39.38
B) $37.50
C) $21.48
D) $20.45

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 next year's dividend ($2.25 * 1.05 = $2.3625), r is the discount rate (11% or 0.11), and g is the growth rate (5% or 0.05). Plugging in the values gives P = $2.3625 / (0.11 - 0.05) = $39.375, which is closest to $39.38.

Which of the Following Amounts Is Closest to What Should