ABC 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%?
A) $7.14
B) $7.50
C) $11.11
D) $11.67
E) $12.25

Question

Quizplus · Accepted Answer

The value of a share today can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is P = D / (r - g), where P is the price, D is the dividend, r is the discount rate, and g is the growth rate. Here, D = $1.00 * (1 + 5%) = $1.05, r = 14% or 0.14, and g = 5% or 0.05. So, P = $1.05 / (0.14 - 0.05) = $1.05 / 0.09 = $11.67.

ABC Imports Paid a $1