Given that the correct value of a common stock is $25, the required rate of return on the stock is 15%, and the dividend growth rate is 5%, using the infinite period
Dividend Discount Model, what will next period's dividend be?
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A. B. C. D. E.D
The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. Rearranging this yields D1 = current value x (k - g). In this question, next period's dividend is equal to
25 x (0.15 - 0.05) = $2.50.