Spacefood Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will grow by 3% per year each year in the future. What will be the current value of a single Spacefood share if the firm's equity cost of capital is 10%?

Question

Quizplus · Accepted Answer

The current value of Spacefood stock can be calculated using the Gordon growth model: 
Current stock price = (Dividend per share next year) / (Cost of equity – Dividend growth rate)

Next year's dividend per share = current dividend per share x (1 + growth rate) = $2.40 x 1.03 = $2.472

Cost of equity = 10%

Dividend growth rate = 3%

Current stock price = $2.472 / (0.10 - 0.03) = $34.29 (rounded to nearest cent)

Therefore, the current value of a single Spacefood share is $34.29. Choice (B) is the correct answer.

Spacefood Products Will Pay a Dividend of $2