If next year's dividend is forecast to be $5.00, the constant growth rate is 4 percent, and the discount rate is 16 percent, then the current stock price should be:
A)$31.25
B)$40.00
C)$41.67
D)$43.33

Question

Quizplus · Accepted Answer

Using the Gordon growth model, 
P = D1 / (r-g)
where P = current stock price, D1 = next year's dividend, r = discount rate, and g = constant growth rate
Plugging in the values, 
P = $5.00 / (0.16 - 0.04) = $41.67 
Therefore, the current stock price should be $41.67.

If Next Year's Dividend Is Forecast to Be $5