Bentham Books pays annual dividends and has just paid this year's dividend of $0.65.If its equity cost of capital is 12%,and dividends are expected to grow by 3% per year in the future,what is the value of Bentham's stock?

Question

Quizplus · Accepted Answer

We can use the constant growth valuation formula to calculate the value of Bentham's stock:

V = D1 / (r - g)

where:
D1 = next year's dividend = D0 x (1 + g) = $0.65 x 1.03 = $0.6695
r = equity cost of capital = 12%
g = dividend growth rate = 3%

Plugging in the values, we get:

V = $0.6695 / (0.12 - 0.03) = $7.44

Therefore, the value of Bentham's stock is $7.44, which is closest to answer choice C).

Bentham Books Pays Annual Dividends and Has Just Paid This