Best Buy Co. (BBY) paid a $0.27 dividend per share in 2003, which grew to $0.49 in 2007. This growth is expected to continue. What is the value of this stock at the beginning of 2007 when the required rate of return is 17.23 percent?

Question

Quizplus · Accepted Answer

To calculate the value of the stock at the beginning of 2007, we need to use the dividend discount model:

P = D/(r - g)

where P is the price of the stock, D is the dividend paid in the most recent year, r is the required rate of return, and g is the expected growth rate of the dividend.

Using the given information, we have:

D(2007) = $0.49
D(2003) = $0.27
g = (D(2007)/D(2003))^(1/4) - 1 = (0.49/0.27)^(1/4) - 1 = 12.02%
r = 17.23%

Plugging these values into the formula, we get:

P = $0.49/(0.1723 - 0.1202) = $49.03

Therefore, the value of the stock at the beginning of 2007 was $49.03. The correct answer is (C).