Doctors-On-Call,a newly formed medical group,just paid a dividend of €.50.The company's dividend is expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter.What is the value of the share if the appropriate discount rate is 12%?

Question

Quizplus · Accepted Answer

We can use the dividend discount model to solve this problem. The formula is as follows:

PV = D / (r - g)

Where PV is the present value of the stock, D is the current dividend, r is the discount rate, and g is the expected growth rate of the dividend.

In this case, we have: 
D0 = €0.50 (the most recent dividend) 
g1-5 = 20% (the expected growth rate for the next 5 years) 
g6 and beyond = 3% (the expected growth rate after 5 years) 
r = 12% (the appropriate discount rate)

Using these values, we can calculate the present value of the stock as follows:

PV = €0.50 * (1+0.20) / (0.12 - 0.20) * (1 - (1+0.03)^-5) / (0.12 - 0.03)
   = €11.17

Therefore, the value of the share is €11.17. The correct answer is B.

Doctors-On-Call,a Newly Formed Medical Group,just Paid a Dividend of €