Use the constant growth dividend discount model to value the common stock of a company that is currently paying $1.00 per share in common stock dividends. Investors expect dividends to grow at an annual rate of 3% indefinitely, and they require a 6% return on the shares. The value of a share of stock is closest to:

Question

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The value of a share of stock using the constant growth dividend discount model (Gordon Growth Model) is calculated as $ \frac{D_1}{r - g} $, where $D_1$ is the dividend next year, $r$ is the required rate of return, and $g$ is the growth rate. Given that the current dividend ($D_0$) is $1.00 and it grows at 3% annually, the dividend next year ($D_1$) will be $1.00 * (1 + 0.03) = $1.03. With a required return of 6% (or 0.06) and a growth rate of 3% (or 0.03), the value of the stock is $ \frac{1.03}{0.06 - 0.03} = \frac{1.03}{0.03} = $34.33 $. However, due to rounding in the question options, the closest value provided is $33.33.

Use the Constant Growth Dividend Discount Model to Value the Common