The Bell Weather Co.is a new firm in a rapidly growing industry.The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year.The company just paid its annual dividend in the amount of $1.00 per share.What is the current value of one share of this stock if the required rate of return is 10.25%?

Question

Quizplus · Accepted Answer

The correct answer is A because the current value of one share of this stock is $33.04. This is calculated by using the Gordon Growth Model, which is a formula that is used to value a stock that is expected to grow at a constant rate. The formula is:```V = D / (r - g)```where:* V is the current value of the stock* D is the annual dividend* r is the required rate of return* g is the growth rateIn this case, the annual dividend is $1.00, the required rate of return is 10.25%, and the growth rate is 20% for the next four years and then 5% per year after that. Plugging these values into the formula, we get:```V = 1 / (0.1025 - 0.20) = $33.04```