A company with a current dividend of $1 per share, a required rate of return of 10 percent, and an expected growth rate of dividends of 5 percent, according to the dividend valuation model, will have a value of a share of stock closest to:

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Quizplus · Accepted Answer

The value of a share of stock using the dividend valuation model (also known as the 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 of dividends. Given a current dividend ($D_0$) of $1, a growth rate ($g$) of 5%, and a required rate of return ($r$) of 10%, the dividend next year ($D_1$) will be $1 * (1 + 0.05) = $1.05. Plugging these values into the formula gives $ \frac{1.05}{0.10 - 0.05} = \frac{1.05}{0.05} = $21. $

A Company with a Current Dividend of $1 Per Share