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Question

Given current earnings of $2.50 per share, an expected dividend growth rate of 12% and a P/E of 12.5, what is the value of the stock?

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A. B. C. D.

B

Value = 12.5 x ($2.50 * 1.12) = $35

To calculate the value of the stock, we can use the Gordon Growth Model, also known as the Dividend Discount Model (DDM). The formula for the Gordon Growth Model is as follows:

Stock Value=Dividend per ShareRequired Rate of Return−Dividend Growth Rate\text{Stock Value} = \frac{\text{Dividend per Share}}{\text{Required Rate of Return} - \text{Dividend Growth Rate}}

In this case, we are given the following information:

  • Current earnings per share: $2.50
  • Expected dividend growth rate: 12%
  • P/E (Price-to-Earnings) ratio: 12.5

First, we need to calculate the dividend per share. Since we are given the earnings per share and the P/E ratio, we can calculate the dividend per share as follows:

Dividend per Share=Earnings per ShareP/E Ratio\text{Dividend per Share} = \frac{\text{Earnings per Share}}{\text{P/E Ratio}}

Substituting the given values:

Dividend per Share=2.5012.5=0.20\text{Dividend per Share} = \frac{2.50}{12.5} = 0.20

Next, we need to calculate the required rate of return. Unfortunately, the required rate of return is not provided in the question. Without this information, we cannot accurately calculate the value of the stock using the Gordon Growth Model. Therefore, the correct answer is D. None of these answers.

In order to calculate the stock value, we need the required rate of return, which represents the minimum return an investor expects to receive for holding the stock. Without this information, we cannot determine the value of the stock accurately.

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