Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The required rate of return is 11%.
A) $20.45
B) $21.48
C) $37.50
D) $39.38
E) $47.70

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where D1 is the dividend next year, r is the required rate of return, and g is the growth rate. D1 = $2.25 * (1 + 0.05) = $2.3625. P = $2.3625 / (0.11 - 0.05) = $39.375, which is closest to $39.38.

Which of the Following Amounts Is Closest to What Should