A stock paid a $10 per share dividend this year. Dividends are expected to grow at 5% per year, forever. What is the value of the stock if the appropriate discount rate is 9% per year?
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A. B. C. D.D
Value = $10.5/(0.09-0.05)=$262.50.
To calculate the value of the stock using the dividend discount model (DDM), we can use the Gordon Growth Model. The Gordon Growth Model states that the value of a stock is equal to the present value of all its future dividends.
The formula for the Gordon Growth Model is:
Value of Stock = Dividend / (Discount Rate - Dividend Growth Rate)
Given the information provided in the question:
Dividend = $10 per share Dividend Growth Rate = 5% Discount Rate = 9%
Let's substitute these values into the formula:
Value of Stock = $10 / (0.09 - 0.05)
Value of Stock = $10 / 0.04
Value of Stock = $250
Therefore, the value of the stock is $250.
However, none of the answer choices provided match this value. It seems there may be an error in the answer choices or the calculation provided. It is recommended to double-check the calculations or contact the exam provider for clarification.