Hurricane Shutters Inc.paid a dividend of $1.30 yesterday.The next dividend will be in one year and is expected to be $1.50.After that,dividends are expected to grow at a constant 15 percent forever.The discount rate for Hurricane Shutters Inc.is 25 percent.What should be the market price of the stock?
A) $17.25
B) $15.00
C) $13.20
D) $13.80
E) $18.75

Question

Quizplus · Accepted Answer

The market price of the stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a perpetually growing dividend), which is given by the formula: P = D1 / (r - g), where P is the price of the stock, D1 is the dividend next year, r is the discount rate, and g is the growth rate of the dividend. In this case, D1 = $1.50, r = 25% or 0.25, and g = 15% or 0.15. Plugging these values into the formula gives P = $1.50 / (0.25 - 0.15) = $1.50 / 0.10 = $15.00.