Krustyburger just paid a dividend of $2 and has a required return of 15%. Which of the following equations represent's today's value of this stock if Krustyburger expects a 10 percent constant growth rate in dividends? a. $2 (1.10) / 0.15 b. $2/[0.15 - 0.10] c. $2/0.15 d. $2 (1.10) / [0.15-0.10]

Question

Chasity

Business

12 November, 19:13

Krustyburger just paid a dividend of $2 and has a required return of 15%. Which of the following equations represent's today's value of this stock if Krustyburger expects a 10 percent constant growth rate in dividends? a. $2 (1.10) / 0.15 b. $2/[0.15 - 0.10] c. $2/0.15 d. $2 (1.10) / [0.15-0.10]

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Answers (1)

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Jasmin · Answer 1

d. $2 (1.10) / [0.15-0.10]

Explanation:

The formula to compute the today value of the stock by using the Gordon model is shown below:

= Next year dividend : (Required rate of return - growth rate)

where,

Next year dividend is

= $2 + $2 * 10%

= $2 + 0.2

= $2.2

And, the required rate of return is 15%

Plus the growth rate of return is 10%

So, the today value of the stock is

= $2.2 : (15% - 10%

= $44