According to the Gordon growth model,what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 15 percent?

Question

Quizplus · Accepted Answer

The Gordon growth model formulation is: 
V0 = D1 / (r – g), 
where
V0 is the intrinsic value of the stock;
D1 is the next year's dividend, assuming dividend growth at a steady rate;
r is the required return on the stock; and
g is the expected growth rate of the dividend.
Given,
current dividend (D0) = $1.00 per year
expected growth rate (g) = 10%
required return (r) = 15%
D1 = D0 * (1+g) = $1.10
Using the Gordon growth model, 
V0 = D1 / (r – g) 
= $1.10 / (15% - 10%) 
= $22
Therefore, the investor's valuation of the stock is $22. 
Option C is the correct choice.

According to the Gordon Growth Model,what Is an Investor's Valuation