Question

The Firm X just paid a dividend of $1.26 per share on its stock. The dividends are expected to grow at a constant rate of 5% per year indefinitely. If investors require a 10% return on Firm X stock, what is the current price?

Answer 1

Answer: $26.46

Step-by-step explanation:

The value of the stock can be solved using the Gordon growth model.

`= (Current dividend * (1 + growth))/(required return - growth rate) \\\\= (1.26 * (1 + 0.05))/(0.10 - 0.05)\\\\= 26.46`

= $26.46