Common Stock Valuation using the Dividend Discount Model (DDM)

A

To value a common stock, the analyst in question is using the Dividend Discount Model (DDM) and has estimated the required rate of return. The DDM is a widely used method to value stocks by discounting their future dividend payments to their present value. The formula for the DDM is as follows:

Value per share = Dividend per share / (Required rate of return - Dividend growth rate)

In this case, the analyst has not provided the dividend per share or the dividend growth rate. However, we can determine the value per share by rearranging the formula and solving for it.

Value per share * (Required rate of return - Dividend growth rate) = Dividend per share

Now, let's examine the answer options and see which one satisfies this equation.

Option A: $14.39 Option B: $21.28 Option C: $31.39

We'll substitute each value into the equation and check if it holds true.

For Option A, let's assume the value per share is $14.39. However, since we don't have the required rate of return or the dividend growth rate, we can't calculate the dividend per share and test the equation. Therefore, we cannot determine if Option A is correct.

For Option B, let's assume the value per share is $21.28. Again, without the required rate of return or the dividend growth rate, we can't calculate the dividend per share and test the equation. So, we cannot determine if Option B is correct either.

For Option C, let's assume the value per share is $31.39. Once again, without the required rate of return or the dividend growth rate, we can't calculate the dividend per share and test the equation. Therefore, we cannot determine if Option C is correct.

Given the information provided, we are unable to calculate the value per share using the DDM and the estimated required rate of return. As a result, none of the provided answer options can be deemed correct.