Krustyburger just paid a dividend of $2 and has a required return of 15%. Which of the following equations represent's today's v

Question

3 years ago

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Krustyburger just paid a dividend of $2 and has a required return of 15%. Which of the following equations represent's today's v

alue of this stock if Krustyburger expects a 10 percent constant growth rate in dividends? a. $2(1.10)/0.15 b. $2/[0.15 - 0.10] c. $2/0.15 d. $2(1.10)/[0.15-0.10]

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1 answer:

Neko [114] · Answer 1 · 2022-03-11T04:10:41+03:00

Answer:

d. $2(1.10)/[0.15-0.10]

Explanation:

The formula to compute the today value of the stock by using the Gordon model is shown below:

= Next year dividend ÷ (Required rate of return - growth rate)

where,

Next year dividend is

= $2 + $2 × 10%

= $2 + 0.2

= $2.2

And, the required rate of return is 15%

Plus the growth rate of return is 10%

So, the today value of the stock is

= $2.2 ÷ (15% - 10%

= $44