Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.
A)33.33
B)166.67
C)41.67
D)60.00

Question

Quizplus · Accepted Answer

The fair value of Bolwork stock can be calculated using the Dividend Discount Model (DDM) formula for stocks with constant growth: $ P_0 = \frac{D_1}{r - g} $, where $P_0$ is the price of the stock today, $D_1$ is the dividend next year, $r$ is the required rate of return, and $g$ is the growth rate of the dividend. Plugging in the given values: $ P_0 = \frac{5}{0.15 - 0.03} = \frac{5}{0.12} = 41.67 $.