What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20%, and a constant dividend growth rate of 6%? A. $19.23 B. $25.00 C. $35.71 D. $37.86

Current Price of the Share Stock is $ 37.86 (D)

Explanation:

Using dividend valuation method with a constant growth rate assumption, share price is calculated as : Po = D1 / (Ke-g).

Where; Po ⇒Market Value excluding any dividend currently payable

D1 = Do (1+g) ⇒Expected dividend in one year's time

Ke = Required rate of return by shareholders

g = Dividend growth rate

Calculation

D1 = 5 (1+0.06) = $5.3

Hence, Po = 5.3 / (0.20-0.06)

Po=$37.86

The share price is expected to reflect the future expected stream of income i. e dividends and capital gains, discounted at an appropriate cost of capital.

Some of the assumptions of dividend valuation method include but not limited to the following:

- it assumed that investors act rationality and in the same way;

-the dividend either show growth or no growth;

-the discount rate used exceeds the dividend growth rate.