Cavalier Custom Design Inc.just paid a dividend of $0.73.Its stock has a dividend growth rate of 5.62% and a required return of 10.21%.What is the current stock price if we anticipate dividends stopping in 20 years?

Question

Quizplus · Accepted Answer

The current stock price can be calculated using the dividend discount model for a stock with a finite dividend growth period. The formula is P = D * [(1 - (1 + g)^n / (1 + r)^n) / (r - g)], where D is the dividend just paid, g is the growth rate, r is the required return, and n is the number of years dividends are expected. Plugging in the values: P = 0.73 * [(1 - (1 + 0.0562)^20 / (1 + 0.1021)^20) / (0.1021 - 0.0562)] gives approximately $9.62.