Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.)
A) $74
B) $32
C) $80
D) $60

Question

Quizplus · Accepted Answer

To calculate the current price of the stock, we can use the constant growth model:
P0 = D1 / (r - g)
where P0 = current price of the stock
D1 = dividend next year = D0 * (1 + g)
D0 = current dividend = $4.45
g = growth rate = 8%
r = discount rate = 14%
Plugging in the values, we get:
P0 = $4.45 * (1 + 8%) / (14% - 8%) = $80.09
Rounding to the nearest dollar, the current price of the stock is $80. Therefore, the best choice is C.

Johnson Corporation Has Just Paid a Dividend of $4