According to the Gordon growth model,what will be the percentage change in the value of a stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% but now are expected to grow by 4% per year?

Question

Quizplus · Accepted Answer

The Gordon growth model is given by the formula V = D/(r-g), where V is the stock price, D is the dividend, r is the required rate of return, and g is the expected constant growth rate of dividends. 
Using this formula, we can see that the current value of the stock is V = $10.00/(r-0.03). 
If the expected growth rate increases to 4%, the new value of the stock will be V' = $10.00/(r-0.04). 
To find the percentage change in value, we can use the formula: % Change = (New Value - Old Value)/Old Value x 100%. 
Plugging in the values, we get % Change = ($10.00/(r-0.04) - $10.00/(r-0.03))/($10.00/(r-0.03)) x 100%. 
Simplifying this expression, we get % Change = [(r-0.03)/(r-0.04) - 1] x 100%. 
To calculate the required rate of return, we need more information about the company. However, we can estimate that the required rate of return is around 8-10%. 
Using a required rate of return of 9%, we get % Change = [(0.09-0.03)/(0.09-0.04) - 1] x 100% = 17.8%. 
Therefore, the answer is B, and the stock price is expected to increase by 17.8% if the expected growth rate increases from 3% to 4%.

According to the Gordon Growth Model,what Will Be the Percentage