Cascade Industries Inc.intends to pay a common stock dividend of $3.18 one year from today and the firm anticipates that the dividend will continue to grow at a rate of 2% per year indefinitely.If the firm has a 13% required rate of return,what is the current price per share of stock?
A)$21.20
B)$28.91
C)$21.62
D)$29.49

Question

Quizplus · Accepted Answer

The current price per share of stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is P = D / (r - g), where P is the price, D is the dividend one year from now, r is the required rate of return, and g is the growth rate. Plugging in the values given: P = $3.18 / (0.13 - 0.02) = $3.18 / 0.11 = $28.91.