Suppose the most recent dividend (\(D_0\)) is \$5.70, the required rate of return (\(r\)) is 10%, and the dividend growth rate (\(g\)) is 5%. According to the Gordon Growth Model, what is the price per share today?

• A. \$85.50
• B. \$119.70
• C. \$114.00
• D. \$57.00

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the Gordon Growth Model formula, which is used to calculate the price of a stock based on its dividends. The formula is: \( P_0 = \frac{D_1}{r - g} \), where \( P_0 \) is the price per share today, \( D_1 \) is the dividend expected next year, \( r \) is the required rate of return, and \( g \) is the dividend growth rate.
2. Step 2: Calculate \( D_1 \), the dividend expected next year, using the formula \( D_1 = D_0 \times (1 + g) \). Substitute \( D_0 = 5.70 \) and \( g = 0.05 \) into the formula.
3. Step 3: Substitute the values of \( D_1 \), \( r \), and \( g \) into the Gordon Growth Model formula \( P_0 = \frac{D_1}{r - g} \). Use \( r = 0.10 \) and \( g = 0.05 \).
4. Step 4: Perform the subtraction \( r - g \) in the denominator of the formula. This represents the difference between the required rate of return and the dividend growth rate.
5. Step 5: Divide \( D_1 \) by \( r - g \) to calculate \( P_0 \), the price per share today. This will give you the theoretical value of the stock based on the Gordon Growth Model.