Using the Gordon Growth Model, with D1 = $2, growth g = 3%, and required return r = 10%, what is the stock price?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

Using the Gordon Growth Model, with D1 = $2, growth g = 3%, and required return r = 10%, what is the stock price?

The Gordon Growth Model values a stock as the present value of an infinite series of dividends that grow at a constant rate. The price today is D1 divided by (r minus g), where D1 is the next dividend, r is the required return, and g is the growth rate. Here, D1 = 2, g = 0.03, r = 0.10. Compute the denominator: 0.10 − 0.03 = 0.07. Then price = 2 / 0.07 = 28.571..., which rounds to $28.57. Since r is greater than g, the price is finite, as the model requires.

Using the Gordon Growth Model, with D1 = $2, growth g = 3%, and required return r = 10%, what is the stock price?

Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Using the Gordon Growth Model, with D1 = $2, growth g = 3%, and required return r = 10%, what is the stock price?

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