Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by 5% annually. What is one share of this stock worth to you today if the appropriate discount rate is 14%?

Question

Quizplus · Accepted Answer

The stock price today can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing perpetuity): P = D1 / (r - g), where D1 is the dividend next year, r is the discount rate, and g is the growth rate. D1 = $1.00 * (1 + 0.05) = $1.05. P = $1.05 / (0.14 - 0.05) = $11.67.

Lee Hong Imports Paid a $1