Intelligent Corp. (IC) pays an annual dividend of $2.00 per share. IC announced it will start to grow the dividend by 15% per year from now on. If IC's shareholders require a 20% return on common shares, what should one share of IC stock sell for?

Question

Quizplus · Accepted Answer

The value of a stock with growing dividends can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a growing dividend), which is P = D1 / (r - g), where P is the price of the stock, D1 is the dividend next year, r is the required rate of return, and g is the growth rate of the dividend. In this case, D1 = $2.00 * 1.15 = $2.30 (since the dividend is growing by 15%), r = 20% or 0.20, and g = 15% or 0.15. Plugging these values into the formula gives P = $2.30 / (0.20 - 0.15) = $46.00.