You are interested in buying a share of stock in CAD Corporation. You expect a dividend payment of $0.50 next year and that the dividend will grow by 5% per year thereafter. You desire a 10% return on your purchase. According to the Gordon growth model, what is the maximum price you would pay for a share of this stock?

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Quizplus · Accepted Answer

The Gordon growth model is used to calculate the intrinsic value of a stock that is expected to pay a constant dividend that grows at a constant rate. The formula for the Gordon growth model is:```Intrinsic Value = Dividend / (Required Return - Dividend Growth Rate)```In this case, the dividend is $0.50, the required return is 10%, and the dividend growth rate is 5%. Plugging these values into the formula, we get:```Intrinsic Value = $0.50 / (0.10 - 0.05) = $10.00```Therefore, the maximum price you would pay for a share of this stock is $10.00.

You Are Interested in Buying a Share of Stock in CAD