Bartlett Batteries Inc.just paid an annual dividend of $1.12.If you expect a constant growth rate of 4% and have a required rate of return of 13%,what is the current stock price according to the constant growth dividend model?

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Quizplus · Accepted Answer

The constant growth dividend model (also known as the Gordon Growth Model) calculates the price of a stock by dividing the next year's dividends per share by the difference between the required rate of return and the dividend growth rate. The formula 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. Since the dividend just paid is $1.12 and it's expected to grow at a rate of 4%, the dividend next year (D1) will be $1.12 * (1 + 0.04) = $1.1648. Plugging the values into the formula gives P = $1.1648 / (0.13 - 0.04) = $1.1648 / 0.09 = $12.9422, which rounds to $12.94.