Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie board of directors declared a dividend of $1.85 yesterday. What should a share of Charlie Company sell for?

Answer 1

Using the Gordon growth model, we can find the value of the stock.

P = D / (r - g)

P = $1.85 / (0.11 - 0.06)

P = $37.

Therefore, a share of Charlie Company should sell for $37.