How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend,the dividends increase by 2.5 percent annually,and you require a 10 percent rate of return?

Question

Quizplus · Accepted Answer

To determine the price we need to use the formula for the Gordon Growth Model:

P0 = D1 / (r - g)

Where:
P0 = current stock price
D1 = expected dividend next year
r = required rate of return
g = expected dividend growth rate

Substituting the values given in the question, we get:

P0 = 0.70 * (1 + 0.025) / (0.10 - 0.025) = $9.57

Therefore, the best choice is C, $9.57.

How Much Are You Willing to Pay for One Share