A stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning about 13%. The estimated selling price of this stock is:

Question

Quizplus · Accepted Answer

The estimated selling price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate. Here, D1 = $2.00 * (1 + 0.06) = $2.12, r = 0.13, and g = 0.06. So, P = $2.12 / (0.13 - 0.06) = $30.29.

A Stock Just Paid a $2