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Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future.Defenestration's equity cost of capital is 13%.
-Assuming that Defenestration's dividend payout rate and expected growth rate remain constant,and Defenestration does not issue or repurchase shares,then Defenestration's stock price is closest to:
A)$50.00.
B)$32.30.
C)$22.25.
D)$30.75.

Question

Quizplus · Accepted Answer

The stock price can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D / (r - g), where P is the price, D is the dividend, r is the cost of capital, and g is the growth rate. Plugging in the values: P = $4.00 / (0.13 - 0.05) = $50.00.

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