Kudrow stock just paid a dividend of $4.76 per share and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently.The required rate of return is 15 percent.The value of Kudrow stock, according to the dividend discount model, is $____.

Question

Quizplus · Accepted Answer

The value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing perpetuity): P = D1 / (r - g), where D1 is the dividend next year ($5), r is the required rate of return (15% or 0.15), and g is the growth rate (3% or 0.03). P = 5 / (0.15 - 0.03) = 41.67.

Kudrow Stock Just Paid a Dividend of $4