During the past 7 years, Burger Flippin' Corp.'s earnings have grown from $0.75 to $1.95 per share.If the past growth rates are expected to continue into the future, what is the current value of Flippin's common stock to an investor who requires a 16% rate of return?

Question

Quizplus · Accepted Answer

To find the current value of Flippin's common stock, we can use the constant growth rate formula:

Current Stock Price = (Next Year's Dividend / (Required Rate of Return - Dividend Growth Rate))

First, we need to calculate the dividend growth rate:
Dividend Growth Rate = (1.95 - 0.75) / 7 years = 0.2 or 20%

Next, we can calculate the next year's dividend:
Next Year's Dividend = $1.95 * (1 + 20%) = $2.34

Now we can use the formula to find the current stock price:
Current Stock Price = ($2.34 / (0.16 - 0.2)) = $111.15

Therefore, the best choice is C, $111.15.

During the Past 7 Years, Burger Flippin' Corp