Jennings Lumber just paid 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 correct formula for computing the current value of a stock with constant growth is the Gordon Growth Model: P = D1 / (r - g), where D1 is the next year's dividend, r is the discount rate, and g is the growth rate. Here, D1 = $1.20 × 1.02, r = 0.13, and g = 0.02.

Jennings Lumber Just Paid an Annual Dividend of $1