Dividend Initiation and Stock Value 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 value is calculated using the Gordon Growth Model: P = D / (r - g). The first dividend is $0.15 in three years, so the present value of this dividend is $0.15 / (1.10)^3. The dividend grows at 9%, so the stock value is $0.15 * (1.09) / (0.10 - 0.09), discounted back to present value.

Dividend Initiation and Stock Value a Firm Does Not Pay