Constant Growth Stock Valuation Target Corp.(TGT)paid a $0.21 dividend per share in 2000,which grew to $0.52 in 2007.This growth is expected to continue.What is the value of this stock at the beginning of 2007 when the required rate of return is 14.77 percent?

Question

Quizplus · Accepted Answer

We can use the constant growth stock valuation model to determine the value of the stock at the beginning of 2007:
 
P0 = D1/(r-g)

where P0 is the current stock price, D1 is the dividend per share paid in the current year (2007), r is the required rate of return and g is the expected constant growth rate of the dividend.

We know that D1 = $0.52, r = 14.77%, and let's assume that the expected constant growth rate is the same as the historical growth rate, which is:

g = (0.52-0.21)/6 = 0.035

Therefore,

P0 = $0.52/(0.1477-0.035) = $62.97

So the best choice is (C), $62.97.