Cantaloupe Growers Corp. is expanding into a new geographic area. Management expects the new market to fuel growth of 22% for three years. After that normal growth of 6% will resume. Cantaloupe's most recent annual dividend was $1.25. Other fruit companies have been returning about 12% lately. How much should a share of Cantaloupe be worth?

Question

Quizplus · Accepted Answer

The correct answer is A because the dividend discount model is used to calculate the value of a share of stock. The formula for the dividend discount model is:```Value of a share = Present value of all future dividends / Required rate of return```In this case, the present value of all future dividends is calculated as follows:```Present value of all future dividends = $1.25 * (1 + 0.22)^3 / 0.12 + $1.25 * (1 + 0.06)^3 / 0.12 + ...```The required rate of return is 12%. Therefore, the value of a share of Cantaloupe is $33.06.