Perrine Industrial Inc.just paid a dividend of $5 per share.Future dividends are expected to grow at a constant rate of 7% per year.What is the value of the stock if the required return is 16%?

Question

Quizplus · Accepted Answer

To calculate the value of the stock using the constant growth dividend discount model, we can use the formula:

Stock price = D1 / (r - g)

Where: 
D1 = the expected dividend per share next year = $5 x (1 + 0.07) = $5.35
r = the required rate of return = 16%
g = the expected constant growth rate of dividends = 7%

Plugging in the values, we get:

Stock price = $5.35 / (0.16 - 0.07) = $59.44

Therefore, the best choice is C) $59.44