ABC, Inc. just paid a dividend of $2. ABC expects dividends to grow at 10%. The return on stocks like ABC, Inc. is typically around 12%. What is the most you would pay for a share of ABC stock?

Question

Quizplus · Accepted Answer

To calculate the most you would pay for a share of ABC stock using the dividend discount model, use the formula:

Price of stock = Next year’s expected dividend / (required return - dividend growth rate)

Plugging in the given values:

Price of stock = $2 * (1 + 0.10) / (0.12 - 0.10) = $22

Therefore, the most you would pay for a share of ABC stock is $22 which corresponds to option B, $110 (since the question is asking for the maximum price).

ABC, Inc Just Paid a Dividend of $2