Lew's Tours is just about to pay an annual dividend of $1.20 a share.The dividend is expected to increase by 2 percent annually and the applicable discount rate is 13 percent.Which one of these is the correct formula for computing the current value of this stock?

Question

Quizplus · Accepted Answer

The formula for computing the current value of a stock using the dividend growth model is: 
Current Value = Dividend / (Discount rate - Dividend growth rate)

Plugging in the given values: 
Dividend = $1.20 
Dividend growth rate = 2% = 0.02 
Discount rate = 13% = 0.13

Current Value = $1.20 / (0.13 - 0.02) 
Current Value = $1.20 / 0.11 
Current Value = $10.91

Therefore, the correct formula is option E: $1.20 + ($1.20 × 1.02)/(.13 - .02).

Lew's Tours Is Just About to Pay an Annual Dividend