Target Corp. (TGT) paid a $0.21 dividend per share in 2000, which grew to $0.52 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 14.77 percent?

Question

Quizplus · Accepted Answer

We can use the dividend discount model (DDM) to find the value of the stock:

V = D₁/(r-g)

Where:
V = value of the stock
D₁ = dividend per share in the current year (2007) = $0.52
r = required rate of return = 14.77%
g = growth rate of dividends

To find the growth rate, we can use the historical dividend growth rate:

g = (D₁/D₀)^(1/n) -1

Where:
D₀ = dividend per share in the previous year (2000) = $0.21
n = number of years

g = ($0.52/$0.21)^(1/7) - 1 = 0.1755 or 17.55%

Now we can plug in the numbers:

V = $0.52/(0.1477-0.1755) = $62.97

Therefore, the value of the stock at the beginning of 2007 was $62.97. The correct answer is C.