What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20 percent, and a constant dividend growth rate of 6 percent?
A)$19.23
B)$25.00
C)$35.71
D)$37.86 P = $5(1.06)/(.20 - .06)
P = 5.30/.14

Question

Quizplus · Accepted Answer

Using the formula for the constant growth model, we can calculate the current stock price as P = D1 / (r - g), where:
D1 = expected dividend next year = $5 x (1 + 6%) = $5.30
r = required return = 20%
g = dividend growth rate = 6%
Plugging in the numbers, we get:
P = $5.30 / (0.20 - 0.06) = $37.86
Therefore, the current price of the stock should be $37.86. The correct answer is D.

What Should Be the Current Price of a Share of Stock