A stock paid an $18 per share dividend this year. Dividends are expected to grow at 5% per year, forever. What is the value of the stock is the appropriate discount rate is 10% per year?
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A. B. C. D.D
Value = $18.9/(0.10-0.05)=$378.00
To calculate the value of a stock using the dividend discount model (DDM), we need to determine the present value of all future dividends. The DDM assumes that the value of a stock is the sum of the present values of its expected future dividends.
In this case, the stock paid an $18 per share dividend this year, and dividends are expected to grow at a rate of 5% per year, forever. The appropriate discount rate is given as 10% per year.
The formula to calculate the value of a stock using the DDM is as follows:
Stock Value=Discount Rate−Dividend Growth RateDividend
Let's plug in the given values into the formula:
Dividend = $18 Discount Rate = 10% = 0.10 Dividend Growth Rate = 5% = 0.05
Stock Value=0.10−0.0518
Simplifying the equation:
Stock Value=0.0518
Stock Value=360
Therefore, the value of the stock, given the provided data and calculations, is $360.
However, none of the provided answer choices match the calculated value of $360. This suggests that there may be an error in the question or answer choices. It is advisable to double-check the given options or contact the exam provider for clarification.