A firm does not pay a dividend. It is expected to pay its first dividend of $0.15 per share in three years. This dividend will grow at 9 percent indefinitely. Using a 10 percent discount rate, compute the value of this stock.
A) $12.28
B) $12.40
C) $16.35
D) $16.50

Question

Quizplus · Accepted Answer

The stock's value can be calculated using the Gordon Growth Model (Dividend Discount Model) for a growing perpetuity. First, calculate the stock price at the time of the first dividend using the formula P = D / (r - g), where D is the dividend, r is the discount rate, and g is the growth rate. Then, discount this price back to the present value. The calculation is: P3 = $0.15 / (0.10 - 0.09) = $15. Discounting back to present value: P0 = $15 / (1.10)^3 = $12.40.

A Firm Does Not Pay a Dividend