To determine the current price of the stock, we need to use the Gordon Growth Model, also known as the Dividend Discount Model (DDM).
The Gordon Growth Model formula is: P = D / (r - g)
Where:
P = Current price of the stock
D = Dividend expected to be paid at the end of the year ($0.75)
r = Required rate of return (12.5%, or 0.125 as a decimal)
g = Expected constant growth rate (8.5%, or 0.085 as a decimal)
Plugging in the values into the formula:
P = 0.75 / (0.125 - 0.085)
P = 0.75 / 0.04
P = 18.75
Therefore, the current price of the stock is $18.75.
A stock is expected to pay a dividend of $0.75 at the end of the year.
The required rate of return is 12.5%, and the expected constant growth rate is 8.5%.
What is its current price?
1 answer