Johnson Company just paid an annual dividend of $1.75. The next dividend will be paid one year from today. Johnson Company expects a constant growth of 5 percent in dividends forever. The required rate of return for this company's common stock is 13 percent. What is the value of one share of common stock?

Question

Quizplus · Accepted Answer

The value of one share of common stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a perpetuity) as follows: P = D1 / (r - g), where P is the price of the stock, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. Given that the dividend next year (D1) will be $1.75 * (1 + 0.05) = $1.8375, the required rate of return (r) is 13% or 0.13, and the growth rate (g) is 5% or 0.05, we can calculate the price as P = $1.8375 / (0.13 - 0.05) = $22.97.

Johnson Company Just Paid an Annual Dividend of $1