If a company currently pays $1.00 per share in dividends, investors expect annual growth in dividends to be 4 percent, and the estimated required rate of return is 10%, the value a share of the company's stock is closest to:

Question

Quizplus · Accepted Answer

The value of a share of the company's stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity with growth), which is P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. Plugging in the values: P = $1.00 / (0.10 - 0.04) = $1.00 / 0.06 = $16.67, which is closest to $17.33.

If a Company Currently Pays $1