Later on today,you will receive an annual dividend of $2.50 a share on ABC stock.The dividend is expected to increase by 2 percent annually thereafter.Which formula should be used to compute the value of the stock today if the discount rate is 14 percent?

Question

Quizplus · Accepted Answer

The formula for computing the value of a stock using the dividend discount model is: 
PV = D1 / (r - g) + P0 
where: 
PV = present value of the stock 
D1 = dividend in the next period 
r = required rate of return or discount rate 
g = expected growth rate 
P0 = current price of the stock

Using the given information, we can compute the present value of the stock as follows: 
PV = ($2.50 x 1.02) / (0.14 - 0.02) + $2.50 
PV = $29.55

Therefore, the best choice is D.

Later on Today,you Will Receive an Annual Dividend of $2