Question

A share of common stock just paid a dividend of $1.00. If
the expected long-run growth rate for this stock is 5.4%, and
if investors' required rate of return is 9.2%, then what is the
stock price?
a.
$27.74
b. $25.80
c. $22.74
d. $33.84
e. $25.52

Answer 1

The stock price is $27.774.

The stock price can be determined using the Gordon constant dividend growth model.  According to the model:

Stock price = DI / (r - g)

Where:

• D1 = dividend in the next period = 1 x ( 1.054) = 1.054
• r = required rate  of return
• g = growth rate

1.054 /  (9.2 - 5.4)

1.054 / 3.8

1.054 / 0.038

= $27.74

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