The stock of the Narnia Corporation is expected to pay a dividend of $1.50 next year. This dividend is expected to grow at a constant rate of 10% a year. If you require a 12% return on
The stock, what is the maximum price you should pay for a share of it?

Question

Quizplus · Accepted Answer

The maximum price you should pay for the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): Price = D1 / (r - g), where D1 is the expected dividend next year ($1.50), r is the required rate of return (12% or 0.12), and g is the growth rate (10% or 0.10). Plugging in the values: Price = 1.50 / (0.12 - 0.10) = $75.00.

The Stock of the Narnia Corporation Is Expected to Pay