Sweet Home Chicago, Inc. stock just paid an annual dividend of $2.10 per share. Dividends are expected to grow at 2.5 percent per year indefinitely, and the required return is 11 percent. What is the current stock price?

Question

Quizplus · Accepted Answer

The current stock price can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the next year's expected dividend, r is the required return, and g is the growth rate. D1 = $2.10 * (1 + 0.025) = $2.1525. P = $2.1525 / (0.11 - 0.025) = $25.32.