Constant growth: 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.)

Question

Quizplus · Accepted Answer

Using the constant growth model formula:

P = D / (r - g)

where 
P = current stock price
D = most recent dividend paid
r = discount rate
g = growth rate

Substituting the given values:

P = 4.45 / (0.14 - 0.08) 
P = 4.45 / 0.06 
P = $74.17

Rounding to the nearest dollar, the current price of the stock is $80, which corresponds to choice C.

Constant Growth: Johnson Corporation Has Just Paid a Dividend of $4.45