Consider the constant growth DDM.In a non-inflationary environment,KD Picture Frame Company is expected to pay a dividend of $2.60 in the coming year,the growth rate of dividends is expected to be 0%,and the required return on the stock will be 8%.If the inflation rate is 4%,KD Picture Frame Company is expected to pay a dividend of $2.70 in the coming year,the dividend growth rate will be 4%,and the required return on the stock will be 12.32%.In the inflationary environment with inflation at 4%,a share of KD Picture Frame's stock should be worth ________.

Question

Quizplus · Accepted Answer

Using the constant growth DDM formula:

Price = Dividend / (Required Return - Dividend Growth Rate)

In the non-inflationary environment:

Price = $2.60 / (0.08 - 0) = $32.50

In the inflationary environment:

Price = $2.70 / (0.1232 - 0.04) = $32.45

Therefore, the share of KD Picture Frame's stock should be worth $32.45 in the inflationary environment with inflation at 4%. The answer is C).

Consider the Constant Growth DDM