Ackert Company's last dividend 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, D1 = $1.55 * (1 + 0.015)^2 = $1.58, rs = 0.12, and g = 0.08. Plugging these values into the formula, we get:P0 = $1.58 / (0.12 - 0.08) = $37.05

Ackert Company's Last Dividend Was $1