The last dividend paid by Wilden Corporation was $1.55.The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever.The firm's required return (r_s) is 12.0%.What is the best estimate of the current stock price?

Question

Quizplus · Accepted Answer

The correct answer is A because the current stock price is $37.05. This is calculated using the Gordon Growth Model, which is:P0 = D1 / (rs - g)where:P0 is the current stock priceD1 is the next dividend paymentrs is the required returng is the dividend growth rateIn this case, the last dividend paid was $1.55, the dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%.So, the next dividend payment (D1) is:D1 = D0 * (1 + g)D1 = $1.55 * (1 + 0.015)D1 = $1.57And the current stock price (P0) is:P0 = D1 / (rs - g)P0 = $1.57 / (0.12 - 0.08)P0 = $37.05

The Last Dividend Paid by Wilden Corporation Was $1