What would be the expected price of a stock when dividends are expected to grow at a 25 percent rate for three years, then grow at a constant rate of 5 percent, if the stock's required return is 13 percent and next year's dividend will be $4.00? A)$61.60 B)$62.08 C)$68.62 D)$79.44 P_o =

Question

Quizplus · Accepted Answer

The expected price of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model). First, calculate the dividends for the first three years with a 25% growth rate, then calculate the terminal value using the constant growth rate of 5% from year 4 onwards, and finally discount these cash flows back to the present value using the required return of 13%.

What Would Be the Expected Price of a Stock When