A firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk involvements. The value of the firm's common stock is ________.
A) $22.50/share
B) $9/share
C) $90/share
D) $30/share

Question

Quizplus · Accepted Answer

The constant annual rate of dividend growth is 9% and the expected dividend per share in the coming year is $2.70. Therefore, the current dividend per share would be $2.70/(1+0.09) = $2.48. Using the dividend discount model, the value of the firm's common stock can be calculated as follows: 
V0 = D1/(r-g) = $2.70/(0.12-0.09) = $90.
Therefore, the value of the firm's common stock is $90/share. Choice C is the correct answer.

A Firm Has Experienced a Constant Annual Rate of Dividend