Question

Question 15 (5 points) A stock just paid a dividend of $2.0 at time 0 (Do). The long-run growth rate of dividends is 5.4%, and investors' required rate of return is 11.4%. What is its current stock price (Po)? A) $37.89 B) $35.13 C) $38.01 D) $39.21 E) $36.78

Answer 1

Calculating the Current Prce of Stock using Dividend Growth Model:-

$Price = \frac{D_0(1+g)}{(Ke-g)}$

where, D0 = $2

g = Long-term growth rate = 5.4%

Ke = required rate of Return = 11.4%

$Price = \frac{2(1+0.054)}{(0.114-0.054)}$

Price = $35.13

So, Current Stock Price is $35.13

Option B

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