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

Question

Quizplus · Accepted Answer

To calculate the most you would pay for a share, you can use the Gordon Growth Model:
Most you would pay = Dividend / (Required Rate of Return - Dividend Growth Rate)
Plugging in the values given:
Most you would pay = $2 / (0.12 - 0.10) = $2 / 0.02 = $100
Since the current price of the share is equal to the most you would pay, we can eliminate choices A, C, and D. Therefore, the best choice is B, $110, which gives a margin of safety and allows for potential growth.

ABC,IncJust Paid a Dividend of $2