According to the Gordon-Growth model, what is the value of a stock with a dividend of $1, required return on equity of 10% and expected growth rate of dividends of 5%?

Question

Quizplus · Accepted Answer

The Gordon-Growth model formula is V0 = D1/(k-g) where,
V0 = intrinsic value of the stock
D1 = next year's dividend
k = required rate of return
g = expected growth rate of dividends

Using the given values, 
D1 = $1*(1+0.05) = $1.05 (expected dividend next year)
k = 10%
g = 5%

Therefore, 
V0 = $1.05/(0.10-0.05) = $21

So the correct answer is D, $21.

According to the Gordon-Growth Model, What Is the Value of a Stock