A company currently pays a dividend of $4.00 per share. It expects the growth rate of the dividend to be 3% (0.03) annually. If the interest rate is 6% (0.06) what does the dividend- discount model predict the current price of the stock should be?

Question

Quizplus · Accepted Answer

The dividend-discount model can be expressed as follows: P = D/(r-g), where P is the stock price, D is the expected dividend per share, r is the required rate of return, and g is the expected growth rate of the dividend. 
Plugging in the given values, P = $4/(0.06-0.03) = $4/0.03 = $133.33. Therefore, the predicted price of the stock should be $133.33. The closest answer option is C, which is $137.33.

A Company Currently Pays a Dividend of $4