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

Question

Quizplus · Accepted Answer

To calculate the value of the stock, we can use the Gordon Growth Model: 
P = D/(k-g)
where 
P = price of stock
D = dividend paid
k = required rate of return
g = growth rate of dividends

Plugging in the values from the problem, we get:
P = 2/(0.12-0.10) = $100

Therefore, the most you should pay for ABC shares is $100. However, since option B is the closest to this value, it is the best choice.

ABC Ltd Just Paid a Dividend of $2