Bensen Co.paid a dividend of $5.25 on its common stock yesterday.The company's dividends are expected to grow at a constant rate of 8.5% indefinitely.If the required rate of return on this stock is 15.5%,compute the current value per share of Bensen Co.stock.

Question

Quizplus · Accepted Answer

The current value per share of Bensen Co. stock can be calculated using the Gordon Growth Model (Dividend Discount Model for stocks with constant growth), which is P = D1 / (r - g), where P is the price, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. Given D0 = $5.25, g = 8.5% or 0.085, and r = 15.5% or 0.155, D1 = D0 * (1 + g) = $5.25 * (1 + 0.085) = $5.69575. Plugging these into the formula gives P = $5.69575 / (0.155 - 0.085) = $81.38.

Bensen CoPaid a Dividend of $5