Horizon Power is expected to grow at a constant rate of 5% forever. The stock recently paid a $2.10 dividend per share. What should Horizon sell for if similar stocks are returning 9%?

Question

Horizon Power is expected to grow at a constant rate of 5% forever. The stock recently paid a $2.10 dividend per share.   What should Horizon sell for if similar stocks are returning 9%?

Quizplus · Accepted Answer

The value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is P = D1 / (r - g), where P is the price, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. Here, D1 = $2.10 * (1 + 0.05) = $2.205, r = 0.09, and g = 0.05. Thus, P = $2.205 / (0.09 - 0.05) = $55.13.

Horizon Power Is Expected to Grow at a Constant Rate