Question #47
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 19
Status: Correct
Correct Answer: A
Question
The value per share for Burton, Inc. is $32.00 using the Gordon Growth model. The company paid a dividend of $2.00 last year. The estimates used to calculate the value have changed. If the new required rate of return is 12.00% and expected growth rate in dividends is 6%, the value per share will increase by:
Answer Choices:
A. 4.17%
B. 9.51%
C. 10.42%
Explanation
The value per share using the new estimates is $35.33 = [$2.0(1.06) / 0.12 - 0.06)] and the
percentage increase in the value per share will be 10.42% = [(35.33 - 32.00) / 32.00]
× 100%.