What will the market price of the stock be?

Question

The XY Company's common stock is expected to pay a $1.00 dividend in the coming year. If investors require a 15% return and the growth rate in dividends is expected to be 5%.

a) $5.00

b) $10.00

c) $15.00

d) $20.00

Answer 1

It will be (b)

$1.00/(.15-.05) = $10

This is an example of the Gordon Growth Model.