Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie's board of directors declared a dividend of $1.85 yesterday. What should a share of Charlie Company sell for?

Question

Quizplus · Accepted Answer

The dividend growth model can be used to find the intrinsic value of a stock. The formula is:

Intrinsic value = Dividend / (discount rate - dividend growth rate)

Using the information given:
Dividend = $1.85
Dividend growth rate = 6%
Discount rate = 11%

Intrinsic value = 1.85 / (0.11 - 0.06) = $39.22

Therefore, a share of Charlie Company should sell for $39.22, which is option A.

Charlie Company Is Expected to Grow at an Annual Rate