What is the current price of a utility company's stock if the current dividend is $0.20, the expected constant growth rate in dividends is 2% and the required return is 8%?
A) $2.00
B) $2.20
C) $3.20
D) $3.40

Question

Quizplus · Accepted Answer

The price of a stock using the Gordon Growth Model (Dividend Discount Model for a perpetuity) is calculated as $ P = \frac{D_1}{r - g} $, where $ P $ is the price, $ D_1 $ is the dividend next year, $ r $ is the required return, and $ g $ is the growth rate. Here, $ D_1 = 0.20 \times (1 + 0.02) = 0.204 $, $ r = 0.08 $, and $ g = 0.02 $. Thus, $ P = \frac{0.204}{0.08 - 0.02} = \frac{0.204}{0.06} = 3.40 $.

What Is the Current Price of a Utility Company's Stock